Background on Joan Domene and His Relevance
Joan Domene, a senior economist at Oxford Economics, has warned about the potential impact of a proposed remittance tax by the Republican Party on money sent from the United States to Mexico. His expertise in economics and understanding of remittance trends make his insights valuable for comprehending the possible consequences.
Understanding the Proposed Tax
The Republican Party’s proposal includes a special tax of 5% or 10% on remittances sent from the U.S. to Mexico. According to Domene, this tax will likely cause a decrease in the total remittance flow but not on a one-to-one basis.
How the Tax Will Affect Remittances
- Reduced Total Remittances: Domene anticipates that the overall remittance amounts will either slow down or slightly decrease when measured in U.S. dollars.
- Increased Peso Value:
- The depreciation of the U.S. dollar against the Mexican peso means that remitters will see an increase in the peso value of their transfers.
- This increased peso value might encourage Mexican workers to continue sending remesas, as their families will still receive a substantial amount in local currency.
- Tax Payment by Remitters: Workers in the U.S. will likely adjust their remittance amounts to ensure that their relatives in Mexico continue receiving the same value in pesos, even after paying the 5% tax.
Additional Pressure on Mexico
Domene highlights that this proposed tax adds to existing pressures on Mexico, including demands for water replenishment, curbing illegal immigration, and combating fentanyl trafficking.
Details of the Republican Proposal
Key Points from the Proposal:
- Tax Incident: The proposal, titled “The One, Big Beautiful Bill,” includes a single clause addressing the tax on remittance transfers.
- Tax Rate: The tax is a 5% special levy on remittance transfers, to be paid by the sender based on the amount transferred.
- Tax Collection: Providers of remittance services are responsible for collecting this tax and forwarding the funds to the U.S. Treasury on a quarterly basis.
- Exemption: The only exception to the tax is when the sender is a verified U.S. citizen, confirmed by “qualified remittance service providers” with an agreement from the U.S. Treasury.
Market Impact
The proposal’s potential consequences have already been felt in the market, with Western Union’s stock dropping by 2.5% on Tuesday.
Western Union, an international money transfer service operating in over 200 countries through agency and online platforms, could be significantly affected by this tax proposal.
Key Questions and Answers
- Q: What is the main impact of the proposed remittance tax?
A: The tax is expected to reduce the total remittance flow, though not on a one-to-one basis. The decrease will be in U.S. dollar terms, while the peso value of remittances is likely to increase due to the depreciation of the U.S. dollar against the Mexican peso.
- Q: Who will bear the brunt of this tax?
A: Ultimately, Mexican workers in the U.S. will likely adjust their remittance amounts to cover the 5% tax, ensuring their families continue receiving the same value in pesos.
- Q: How will this tax affect remittance service providers?
A: Providers of remittance services, like Western Union, will be responsible for collecting and forwarding the tax to the U.S. Treasury. This could negatively impact their operations and stock prices.
- Q: What other pressures does Mexico currently face?
A: In addition to the proposed remittance tax, Mexico is dealing with demands for water replenishment, curbing illegal immigration, and combating fentanyl trafficking.
