Taxing remittances helps make US neighbors poorer, less stable

Among the elements of the budget bill working its way through the U.S. Congress is a proposal for a 3.5% tax on all retail money transfers made by all non-citizens residing in the United States (including those with legal status) to other countries.

Otherwise known as remittences, these are transfers typically made by immigrants working in the U.S. to help support family back home.

The revenue impact of the bill is expected to be relatively small; the Tax Foundation cites estimates from the Joint Committee on Taxation that the tax revenue over 10 years will likely amount to $26 billion. To put this in perspective, the U.S. fiscal deficit in 2024 alone was estimated at $1.8 trillion (or 6.4% of U.S. GDP), so the remittance tax would bridge less than 0.16% of the deficit.

While the direct fiscal impact of the tax on the United States might be small, the consequences would be much greater outside the country, with a particular impact on many of America’s neighbors. According to the World Bank, global remittances to lower and lower-middle income countries amounted to $685 billion in 2024. The World Migration Report put U.S. outbound remittances at $79 billion in 2022.

However it is likely that this number is a significant underestimate as outbound data for source countries typically captures only about 65% of funds received. The countries receiving the largest inflows were India with $129 billion and Mexico with $65 billion. In both instances, the inflows are a small (but still meaningful) portion of GDP, at roughly 3.4% of GDP in India and 3.9% in Mexico.

But remittances play a far larger economic role for the smaller countries in the Western Hemisphere. The Inter-American Development Bank’s estimates showed Central America receiving $46 billion in remittances in 2024, while $18 billion went to the countries in the Caribbean. And World Bank statistics for 2024 show their importance — remittances accounted for between roughly 18% and 26% of GDP for Haiti, Jamaica, Guatemala, El Salvador, Honduras, and Nicaragua, all countries with sizable immigrant populations in the U.S.

While the tax appears small as a percentage of the amount sent, it will take yet another bite out of remittance income. Even before the proposed tax, the World Migration Report put the 2023 cost of money transfers from the U.S. to Central America and the Caribbean at just under 6% of the transmitted amount. These costs may well rise above a total of 10% given the increased burden of verification and record-keeping that the transmitting agency would be required to comply with.

This runs counter to one of the United Nation’s sustainable development goals, which has been to reduce the cost of remittances to 3% by 2030, based on the expectation that the development of personal digital transfer technology would lead to such an outcome. And its focus on remittance costs reflects the sheer importance of such flows for many countries in the Global South. The World Bank report cited above notes that emittance flows to poorer countries have for years exceeded the amount of Foreign Direct Investment (FDI) and foreign aid they receive combined.

Further, the remittance tax proposal comes at a time when other forms of American economic engagement with the Global South are also broadly in retreat. Washington has cut foreign aid to poor countries drastically, and other wealthy countries, under pressure to increase their defense budgets, have also reduced their own aid programs.

Trade ties are also under stress, even with America’s closest neighbors. While Mexico was spared the administration’s retaliatory tariffs on Liberation Day, tariffs that violate the USMCA free-trade agreement have been imposed on the non-U.S. content of fully assembled automobiles imported from Mexico. Along similar lines, the timeline for tariffs on auto parts suggests a desire to force a repatriation to the U.S. of a good portion of the industry’s capacity that had migrated to Mexico over the past several decades.

Meanwhile, countries in Central America also escaped the worst of the Liberation Day retaliatory tariffs, with most receiving only the minimum 10% tariff (Nicaragua got 19%) but even this tariff runs counter to tariff-free access they were supposed to receive under the provisions of Washington’s free trade agreement that covers the region and the Dominican Republic, CAFTA-DR. The impact will be especially pronounced in the apparel sector.

Thus, this is yet another region caught up in the battles within an administration divided on the relative merits of nearshoring; that is, bringing parts of Mexico, Central America, and the Caribbean into American supply chains, as opposed to a full reshoring within the U.S.’s own borders. The treaty that is the anchor of nearshoring, USMCA, is up for a review that needs to be completed by July 1, 2026. The outcome will give a hint of administration policies towards the broader region —for example, whether it wishes to renegotiate and modify CAFTA-DR, ignore it, or abrogate it.

The remittance tax issue is part of a broader question about how the U.S. sees the intersection of its economic and strategic concerns in the poorer countries of the Global South, and involves difficult choices involving domestic politics and national security.

Deeper economic engagement through investment, trade, and official assistance could promote economic development that lessens the pressures that are manifested in the metric of remittances as a share of GDP in key countries of the region.

Conversely, targeting remittances through tax policy (among a host of other measures) could serve to heighten economic distress that, in turn, increases incentives for poor people to leave their homelands for wealthier countries, including the United States, despite the considerable risks involved.