Congress designed the tax code to raise revenue and to foster various policy goals. In doing that, it should not discriminate against its own people. But when it comes to employment hiring decisions, it does exactly that — it incentivizes employers to employ immigrants over equally qualified U.S. citizens and resident counterparts.
How is this possible? A common experience shared by U.S. citizens and residents is seeing sizable portions of their paychecks taken out in the form of employment taxes to fund Social Security and Medicare. In addition, their employers must separately pay these taxes too (and federal unemployment tax to boot).
The combination of employment taxes is not insignificant, taking a steep percentage out of workers’ paychecks and similarly reducing business profitability.
Perhaps surprisingly, the situation is wholly different with respect to foreign students coming to the nation’s shores. The tax code exempts workers on student visas and their employers from employment taxes.
In the past, the cost in foregone tax revenue associated with the student visa tax exemption was likely meager. The number of foreign students was negligible, and it was perhaps expected that many would return to their home countries.
Yet in today’s global environment, and given the broad desire for U.S.-based education and work experience, the number of foreign students attending U.S. universities has dramatically increased over the last half century. This fundamental transformation is one that Congress likely neither accounted for nor contemplated, and it is costing billions in foregone tax revenue.
How does this employment bias manifest itself in the workplace? Suppose a newly hired U.S. citizen were to earn $100,000 in wages. She would pay $7,650 in Social Security and Medicare taxes, and her employer would bear an equivalent tax, plus a federal unemployment tax of $420.
In contrast, if this same person were on a student visa, or a recent foreign graduate allowed to work in the U.S., neither she nor her employer would pay any employment tax.
Given the choice between two equally qualified job candidates — the U.S. citizen or the foreign candidate — the economic choice is clear: The foreign candidate is cheaper to hire due to the reduced tax burden.
This discriminatory effect may be even more pronounced for entry-level jobs, given that many applicants share the same bona fides — namely, being a recent college graduate.
Historically, there is an underlying rationale for this exemption. Foreign students generally would not be eligible for the programs supported by these taxes (e.g., Social Security), particularly if they returned to their home country after graduation.
However, facts on the proverbial ground have changed. First, many students may later seek citizenship or residency in the U.S. Second, there is a pressing financial need to keep Social Security solvent. Finally, query whether the tax code should discriminate against its own citizens and residents as they compete in an ever-more demanding and competitive workforce.
Congress has several reform options it might consider. It could, for example, repeal the exemption altogether or repeal the exemption on the employer tax obligation; alternatively, it could strictly limit the exemption to those students up to the point when they secure their degrees.
Fundamentally, the tax code should not discriminate against its own citizens. Indeed, as Congress reexamines tax and immigration policies, it should also critically examine their intersection and the incentives it creates and those it may harm.
Congress should give due consideration to this important issue and decide whether the status quo is in our national interest or if reform is needed.
Jay A. Soled is a distinguished professor of Taxation at Rutgers Business School and Timothy M. Todd is dean and professor of Law at Liberty University School of Law. They are the authors of the academic article, “Hiring Biases Fostered Under the Code.”
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