Introduction
The Center for Global Development, a US-based think tank, warns that Mexico will be the most affected country among global leaders receiving remittances if the US Senate approves a 3.5% tax on these transfers.
Impact on Mexico
If the proposed tax in the US Senate becomes law, the estimated annual remittance flow to Mexico would decrease by $2.6 billion, based on the 2024 projection of $64 billion sent. This estimate assumes linear and symmetric effects, with senders maintaining their average remittance levels.
The proposed tax could further reduce remittances through two channels: decreasing the transfer amount to pay for the tax and completely discouraging formal channel usage. According to a 2021 study, a 1% increase in remittance sending costs reduces transfers by 1.6%.
Mexico, along with India, China, Vietnam, Guatemala, Dominican Republic, and El Salvador, is expected to experience reduced formal transfer amounts due to the tax. This could lead to lower family incomes, weaker consumption, and increased currency pressures in these countries.
Analysis and Projections
The analysis, led by Helen Dempster, Charley Ward, and Sam Huckstep, suggests that the tax could decrease both remittance amounts and sending frequency. Mexican migrants are more likely to absorb the tax cost due to their lower financial margin compared to Central American counterparts.
“Mexican migrants send an average of 16.7% of their income to Mexico, while Guatemalans send an average of 45%, indicating less financial flexibility for additional costs,” the report states.
The researchers also anticipate changes in remittance sending methods, such as:
- Requesting US citizens to send money on their behalf
- Using interbank transfers instead of remittance services
- Employing informal transfer channels
Key Questions and Answers
- What is the proposed tax and who will be affected? The proposed tax is 3.5% on remittances, and Mexico, along with other countries like India, China, Vietnam, Guatemala, Dominican Republic, and El Salvador, will be significantly impacted.
- How much will remittances to Mexico decrease? The Center for Global Development estimates a $2.6 billion reduction in annual remittances to Mexico if the tax is implemented.
- Why are Mexican migrants more capable of absorbing the tax cost? Mexican migrants send a smaller percentage (16.7%) of their income compared to Guatemalans (45%), implying less financial flexibility for additional costs.
- How might migrants change their remittance sending methods? Migrants may request US citizens to send money on their behalf, use interbank transfers instead of remittance services, or employ informal transfer channels to avoid the tax.
