Introduction
During his second term, President Donald Trump reintroduced a controversial proposal: an imposition of taxes on remittances sent from the United States to foreign countries. After extensive debate in the House of Representatives, the tax was approved with 215 votes in favor and 214 against, setting the rate at 3.5%. This measure is part of the “Big Beautiful Bill” fiscal project, aiming to preserve tax cuts from his first term and fund new deductions.
The Rationale Behind the Tax
The tax on remittances is justified as a means to offset the fiscal deficit generated by Trump’s economic policies and strengthen border security. However, experts argue that the revenue from this tax is negligible compared to the massive deficit caused by Trump’s economic plans.
Experts’ Concerns
- Marginal Revenue: The “Committee for a Federal Budget Responsible” estimates that Trump’s proposals will increase the US debt by over $5.4 billion in the next decade. In contrast, the remittance tax could generate around $3.25 billion annually, considering only money sent to Mexico, the primary destination for remittances from the US.
- Impact on Mexican Families: In 2024, remittances reached $64 billion, surpassing oil income. They support more than 10 million households in Mexico, with over a third of remittance-receiving households located in towns with fewer than 2,500 residents. According to the Center for Latin American Monetary Studies (CEMLA), remittances account for 10-14% of the state GDP in Oaxaca, Zacatecas, Michoacán, Guerrero, and Chiapas.
- Incentivizing Financial Informality: BBVA Mexico warns that quadrupling the cost of sending money will push many migrants to use non-bank channels, increasing fraud and money laundering risks by criminal organizations. This policy would destroy a formal, competitive, and secure remittance market, opening the door to informal and dangerous methods.
Misconceptions in the Proposal
The proposal is based on false assumptions, such as undocumented migrants not paying taxes. However, the Institute on Taxation and Economic Policy (ITEP) reports that undocumented migrants contributed $96.7 billion in federal, state, and local taxes in 2022, averaging $8,889 per person. Over a third of this tax revenue supports programs like Social Security, Medicare, and unemployment insurance, which undocumented migrants cannot access due to their legal status.
Concerns about Illicit Activities
There are concerns that a fraction of remittances sent to Mexico might originate from illicit activities, though there’s no consensus on the extent. According to a Mexican think tank, Signos Vitales, around 7.6% of remittances (approximately $4.4 billion out of $58.497 billion) in 2022 could be linked to money laundering from narcotics trafficking. However, BBVA Mexico states that there’s no solid evidence of widespread illicit money in remittances, attributing growth to the US economic recovery and improved employment for Mexican migrants.
Legalizing Undocumented Migrants
The ITEP study suggests that legalizing all undocumented immigrants would increase their tax contributions by $40.2 billion annually, totaling $136.9 billion. Of this amount, $33.1 billion would go to the federal government, and $7.1 billion to state and local governments.
Conclusion
The proposed fiscal measure underestimates the economic significance of migrants, especially undocumented ones, in key sectors of the US economy. A portion of the 3.5% tax on remittances will directly impact those sending them, absorbing the additional cost.
Key Questions and Answers
- What is the proposed tax on remittances? The tax, part of the “Big Beautiful Bill,” aims to offset the fiscal deficit and strengthen border security by imposing a 3.5% tax on remittances sent from the US to foreign countries.
- How will this tax affect Mexican families? The tax could reduce available income for millions of Mexican families, limiting their capacity to cover basic needs like healthcare, education, and food. It may also push migrants towards informal financial channels, increasing fraud and money laundering risks.
- Are undocumented migrants significant tax contributors? Yes, according to the ITEP, undocumented migrants contributed $96.7 billion in taxes in 2022, with over a third supporting programs they cannot access due to their legal status.
- What are the concerns about illicit activities in remittances? While there are indications that some remittances might be used for money laundering, most remain a legitimate and essential source of income for millions of Mexican families. A better approach would be to pursue criminal activities related to drug trafficking and implement a clear, swift migration policy for legalization.
