PUBLIC FINANCE AND INDIVIDUAL PREFERENCES OVERGLOBALIZATION STRATEGIESGORDON H. HANSON, KENNETH SCHEVE,AND MATTHEW J. SLAUGHTERDo preferences toward globalization strategies vary across public-finance regimes? In this paper, we use data on individual preferencestoward immigration and trade policy to examine how pre-tax and post-tax cleavages differ across globalization strategies and state fiscal jur-isdictions. High exposure to immigrant fiscal pressures reduces supportfor freer immigration among U.S. natives, especially the more skilled.The magnitude of this post-tax fiscal cleavage is comparable to the pre-tax labor-market effects of skill itself. There is no public-finance varia-tion in opinion over trade policy, consistent with U.S. trade policyhaving negligible fiscal-policy impacts. Public finance thus appears toshape opinions toward globalization strategies.1. INTRODUCTIONINTERNATIONAL ECONOMIC policies that regulate the flow of goods, capital,and labor across borders vary substantially not only across countries andover time but also within these different dimensions of integration with theworld economy. One of the major puzzles in political economy is why somany countries appear to adopt relatively liberal trade policies but relativelyilliberal immigration regulations. Trade and immigration liberalization bothhave the potential to improve a country’s economic welfare through effi-ciency gains. Because international flows of goods and labor both work tointegrate national labor markets with the global economy, these policiesoften have similar effects on worker outcomes in the labor market, leadingmany scholars to view the distributional consequences of liberalization to bequite similar as well.Absent a simple efficiency or distributional explanation, most existingscholarship turns to important non-economic differences between trade andimmigration policy. Most obviously, negative voter attitudes toward foreigncultures and minority g roups may be more influential for immigration thantrade, leadi ng to relatively more public support for liberal trade policies.In this paper, we develop an alternative argument: government policiesthat redistribute income alter the distributional politics over trade and im-migration policy and often favor trade as opposed to immigration as astrategy for international economic integration. In short, we argue thatCorresponding author: Kenneth Scheve, Department of Political Science, Yale University,PO Box 208301, New Haven, CT 06520-8301, USA. E-mail: [email protected] 2007 The Authors. Journal compilation r 2007 Blackwell Publishing Ltd.,9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA02148, USA.1ECONOMICS & POLITICS 0954-1985Volume 19 March 2007 No. 1public finance considerations can have a major impact on who supportsliberalization and what kind of liberalization is favored.Freer trade and immigration can affect government fiscal activity bycomparable amounts, through their similar impacts on labor demand andthus pre-tax labor income. But there may be important fiscal differencesbetween the two. Per haps most crucially, immigrants may pay taxes, mayreceive public services, and may vo te over tax and spend ing choices. Im-ports, obviously, do none of these things. This suggests that quite differentpolitical coalitions may organize around trade and immigration be cause ofdifferent public-finance considerations, making globalization cleavages morefractious than they might otherwise appear.Consider the example of the United States. What are the labor-marketimpacts of freer trade and immigration? The U.S. comparative advantage inmany skill-intensive products means that freer trade is likely to lower thepre-tax earnings of less-skilled natives relative to more-skilled natives via theStolper–Samuelson process (Stolper and Samuelson, 1941). For some timenow, less-skilled individuals have comprised a large share of U.S. im-migrants. In 2000, 31% of foreign-born adults in the United States had o12years of educatio n, compared with only 13% of native-born adults. Becauselow-skilled and high-skilled labor tend to be complements, freer immigrationis likely to alter pre-tax earnings of natives like trade does. There is nowabundant evidence that freer trade and immigra tion have in fact generatedthese pre-tax wage pressures.1But do trade and immigration generate any post-tax impacts throughfiscal channels? Freer trade might shift economic activity and thus tax rev-enue across different states, with labor-market churning in the process. Butthe magnitude of additional fiscal costs from this adjustment in countrieslike the United States is likely to be modest, given the limited extent ofprograms for labor-market adjustment and that trade, unlike immigration,does not change the potential pool of those receiving public assistance. Forexample, the only U.S. outlay explicitly linked to trade liberalization, TradeAdjustment Assistance (TAA), has recently cost o$300 million a year –about 0.01% of total federal spending in fiscal 2004. Revenue effects fromtrade liberalization are also likely to be relatively small: the U.S. Constitu-tion prohibits states from taxing trade, and at the federal level trade taxeshave recently constituted o1% of total federal revenue.2But in many U.S. states, immigrants have access to public assistancefinanced by taxes. Indeed, there is abundant evidence that immigrants makegreater use of means-tested welfare programs than do natives. Freer im-migration may thus increase the net tax burden on U.S. natives and thus1For surveys on trade, see Feenstra (2000) and Feenstra and Hanson (2003). For important migra-tion studies, see Borjas et al. (1997), Card (2001), and Borjas (2003).2Fiscal revenue data come from International Monetary Fund (2004). TAA informationcomes from Kletzer and Litan (2001).2 HANSON ET AL.r 2007 The AuthorsJournal compilation r 2007 Blackwell Publishing Ltd.tend to lower their post-tax income. Progressive tax regimes are common inthe United States, which means that this fiscal burden may especially hithigher income and more-skilled natives. All this suggests that freer im-migration is likely to be evaluated by natives for not just its labor-marketimpacts but its fiscal impacts as well.3To make these fiscal concerns concrete, consider the recent experiences ofCalifornia and Texas. In the mid-1990s, both states had fiscally conservativegovernors