The bipartisan immigration proposal from Republican and Democratic senators known as the Gang of Eight, likely to be released in legislative form next month, contains a core principle that undocumented immigrants must pay back-taxes and a fine before they receive probationary visas.
But although similar language appeared in prior immigration bills, surprisingly little attention has been given to the difficulties of calculating taxes owed, and how they will be paid.
Calculation of back-taxes and enforcement of payment is likely to be so complex and onerous that Congress would be better off setting a flat fee, potentially payable as an extra tax out of future earnings. This issue matters not only because clear and workable tax rules are important, but also because undocumented workers' reimbursement of back-taxes is meant to settle their debt to society for violating U.S. immigration laws. If Congress passes a tax that's uncollectable, anti-immigrant organizations will have the opportunity to say, "I told you so."
It's difficult for the Internal Revenue Service to compute back-taxes for law-abiding Americans and resident aliens. It is even harder to calculate tax obligations for undocumented workers who have no W2s, no 1099s and no records.
The longer someone has stayed, the more complex the problem becomes, because that individual is likely to have had multiple employers. Yet immigrants who have been here for a long time have many American connections, including native-born spouses and children. It's in everyone's interest for them to have legal status.
After the IRS calculates how much tax is owed, immigrants -- some with low incomes -- need to come up with potentially large sums of money. This would place a substantial administrative burden on the IRS, which will already be overworked enforcing tax penalties in the Patient Protection and Affordable Care Act.
It's unrealistic to expect people to reveal all their job history with wages and salaries. Those applying to stay in America might believe that disclosing such information would only cause more, and not fewer, problems. A new law that would require complete back-tax payments as a condition of legalization would create a disincentive for many immigrants to participate.
In addition, the disclosure of prior employment by undocumented immigrants may place employers in a difficult position by causing them to reveal that they have hired immigrants illegally. Employers may become liable for penalties if it is proven that they hired undocumented workers, so they may deny it.
And even if the IRS could receive employment documentation and earnings for an applicant, calculating exact tax liability can be a complicated matter. Consider the problems of a U.S. citizen who is subject to an IRS audit for tax payments within the past five years. Now try the calculation for 11 million undocumented immigrants, each with different circumstances. Neither the IRS nor any other agency is set up to handle tax filings from millions of individuals with incomplete documentation.
University of Chicago Nobel laureate Gary Becker and Stanford University professor Edward Lazear, in a Wall Street Journal op-ed on March 1, suggested payment of a flat fee of $50,000 for current undocumented workers and new immigrants.
Perhaps $50,000 is too high or too low. But a flat fee is elegant and persuasive and would treat everyone equally. And to make it manageable, it could be collected as a percentage of future earnings for those who could not pay up front, with a stream of revenues going to the Internal Revenue Service or the Department of Homeland Security.
Payment of back-taxes and a fine in exchange for legal status makes a fine soundbite, but it would be a nightmare to administer. Congress should keep it simple and go for a flat fee.