Trump's 1% Mistake: How a Remittance Tax Will Fuel the Immigration It Aims to Stop

Last month, President Trump signed the One Big Beautiful Bill Act (OBBBA), a budget reconciliation bill that had quite a bit in it considering it is over 1,100 pages long. As I mentioned shortly after the enactment, I would probably need to cover other provisions in the future and here we are. The Left-leaning outlet Vox brought one such provision to my attention: a one percent remittances tax. A remittances tax is an excise tax imposed on the non-commercial transfer of money that individuals send from one country to another. Remittances are most common for immigrants who send money to their families in their home country. 

Despite of what some might think, remitted dollars are not "lost" because the U.S.' global dominance means that the dollars return in the form of trade, investment, and dollar demand. Rather than disappear, remittances act more like temporary outflows. So why did the Republicans decide to tax remittances? In the Committee report's own words:  

The Committee believes that the ability of non-citizens and non-nationals of the United States to send payments to individuals in other countries through the system of remittance transfers may encourage illegal immigration and lead to the over reliance of some jurisdictions on the receipt of such remittance flows.

In short, the justification is curtailing illegal immigration. Some might argue that because it was initially proposed at 5 percent and eventually lowered to 1 percent, that somehow makes it better. Guess what? It really does not, and not simply because the 1 percent applies to all remittance senders, including U.S. citizens (although bank accounts and U.S.-issued credit cards and debit cards are exempt). This tax will have many ramifications both in the United States and the global economy. 

Taxes have two main functions: to generate revenue and to discourage. First, let us take a look at the revenue. In the case of the remittances tax, the Joint Committee on Taxation (JCT) estimated that it would generate $10 billion in revenue over the next decade. The Center for Global Development (CGD) puts the estimate at an even lower $4 billion in revenue over that time period. Remittances taxes imposed in other countries offer little hope. An International Monetary Fund (IMF) study found that the other two nations that notably have a remittances a tax, Gabon and Palau, did so while generating a negligible enough amount of revenue where both countries scrapped the tax.

I am not too optimistic about the revenue estimates considering that the compliance costs will diminish actual revenue, including requirements for financial institutions to distinguish between taxable and exempt payment methods, maintain detailed transaction records, and manage refundable tax credits for eligible senders. The compliance will also violate data privacy since the financial institutions will have to collect and share such sensitive personal data such as citizenship status and payment method details. While it will hit low-income and immigrant communities most heavily, U.S. citizens may face privacy risks due to increased financial surveillance, documentation requirements for refunds, and potential misclassification or data exposure. 

What behavior does a remittance tax discourage? Sending money to other countries. This might sound like a win for the anti-immigration Republicans, but it will not be. Remittances outpace foreign direct investment and overseas development aid at a rate of 3 to 4 times. Destinations include such nations as Mexico, El Salvador, Guatemala, and India, which are among the top countries of origin for the undocumented workers that Trump does not want illegally entering the country. 

A study from the Center for European, Governance, and Economic Research found that a one percent increase in the cost of sending remittances translates into a 1.6 percent decrease in remittances sent (Martínez-Zarzoso et al., 2020). This is a big deal because remittances account for at least 3 percent of GDP for 78 countries (World Bank). The Center for Global Development used the aforementioned study along with bilateral remittances data from the World Bank to find that Mexico that stands to lose, at $1.55 billion annually. 

In terms of percentage of GNI, El Salvador, Honduras, Jamaica, and Guatemala will feel it the most (see below).

A one percent tax does not sound like a lot, but it translates into money that never reaches people in developing countries. For example, remittances in Mexico have helped pay for medical bills and support pensions and public services. With underdeveloped banking systems, cash is often how many in developing countries receive money. As the Overseas Development Institute brings up, remittances are effective because have a greater impact on poverty reduction because they directly reach a greater share of the population and more poor households, not to mention that the greater purchasing power results in greater economic utility. By curtailing funds that help people in developing countries that reduce poverty, cope with financial shocks, and weather natural disasters, life will become that much more unstable for people in these countries. The increased instability created as a result will incentivize citizens in developing countries to want to emigrate to the United States, which undermines Trump's stated goal of curtailing illegal immigration.

Then there is the matter of crime. Taxing remittances incentivizes sender to bypass regulated services providers and push their transactions into informal or underground channels, which like all underground markets, are less transparent and harder to monitor.  This shift makes it more difficult to trace illicit flows, thereby undermining national security and foreign policy interests. Because this will push immigrants to underground options, they will be exposed to greater fraud, theft, and organized crime exploitation.  

On top of all of this, this remittances tax has the hallmarks of inferior tax policy. It is a form of double taxation because migrants already pay an income tax to the host country. It is a regressive tax because remittances are most commonly sent to the poor families of migrants, thereby increasing the burden of poverty. This remittances tax is also non-neutral because it discourages an arrangement where a household is split between the United States and another country. This tax is targeted, inconsistent with an overall tax design for a country without a value-added tax (VAT). The targeted nature of this tax is hypocritical considering that the GOP is purportedly the party of family values and these remittances senders are trying to help their families in poverty-stricken parts of the world.

Ultimately, the remittances tax is not about controlling immigration. This misguided and counterproductive tax will weaken economies abroad, disrupt families, and burden law-abiding individuals with needless bureaucracy and privacy violations. It is a tax that raises little revenue, targets vulnerable communities, and increases government surveillance. This policy ends up depreciating the American values of opportunity and responsibility that made this country great. This tax will contribute to the global inequalities that fuel migration in the first place. Instead of deterring it, this tax will fuel the immigration at a considerable human and economic cost.