Which Countries Will Be Hit Hardest by the US Remittance Tax?

Please note: President Trump’s “Big, Beautiful Bill,” has now passed the US Senate. The tax has been reduced to 1 percent, and now applies to all remittance senders (including US citizens). We have updated our previous estimates of the impacts accordingly in a new blog. 

President Trump’s “big, beautiful bill," which has passed the House of Representatives, includes a 3.5 percent tax on remittances, money migrants send home to family and friends. The tax will apply to an estimated 40 million non-US citizens—green card holders, temporary workers, and undocumented immigrants—and will affect millions more. Remittances are a crucial source of household income and economic stability for low- and middle-income countries. Indeed, for many of these countries, the impact of the remittance tax will far outweigh the impact of aid cuts.

Estimating the impact on remittances

We’ve estimated the potential impact of a 3.5 percent remittance tax on countries which send migrants to the US. This requires us to make some assumptions. We used the World Bank’s bilateral 2021 remittance estimates, and updated them to reflect a 14.1 percent increase in global remittances between 2021 and 2024. Then, we used US Census Bureau data on migrants’ citizenship status, which is categorized by continent, to estimate the proportion of each country’s migrants that would be affected by the tax (i.e., non-US citizens).

The proposed tax would be likely to reduce remittances sent through formal channels (such as banks and money transfer operators like Western Union) in two ways: (1) by reducing the amount sent, as a portion is diverted towards the tax; and (2) by discouraging remittances altogether.

Research by Ahmed et al. (2021), suggests that for every 1 percent increase in the cost of sending remittances, the amount sent falls by around 1.6 percent. Assuming linear and symmetric effects, that means that if the new tax raises costs by 3.5 percent, that could lead to a 5.6 percent drop in remittances.

(This reduction could also have knock on effects, which we have not included in our calculations due to lack of an elasticity estimate. With less money flowing through their channels, providers may be forced to raise fees, which itself will reduce sending further.)

The figures below show how the United States’s proposed tax could impact formal remittances, including both the tax itself and the price effects. Unsurprisingly, we find that Mexico stands to lose the most in absolute terms, over $2.6 billion per year. This is followed by a few large middle-income countries (India, China, Vietnam) and several Latin American countries (Guatemala, Dominican Republic, El Salvador).

Figure 1. Estimated reduction in annual remittances by destination (US$ million)

Central American countries are projected to suffer the greatest loss relative to their gross national income (GNI), with El Salvador—a close ally of the Trump administration—projected to lose the equivalent of over 1 percent of GNI. Where the effects of the tax are significant relative to GNI, countries could experience lower household incomes, weaker consumer demand, and increased exchange rate pressures.

Figure 2. Estimated reduction in annual remittances by destination as % of GNI

Figure 3. Estimated reduction in US remittances by country (low- and middle-income)

For many countries, the remittance tax would be a further crushing blow after the recent cuts to US aid. For example, Liberia is a country heavily reliant on both foreign aid and remittances: a quarter of the country’s foreign assistance came from the US, and remittances totalled more than three times Liberia’s bilateral foreign aid in 2023. The US aid cuts were already projected to remove the equivalent of 2 percent of GNI; even though it is small, the remittance tax will remove another 0.2 percent.

Using country-level estimates of USAID cuts by CGD colleagues, we show cumulative losses to the remittances tax and foreign aid cuts below. (Note: this only includes awards known to have been terminated.) For many low- and middle-income countries, the impact of the remittance tax far outweighs the impact of known US aid cuts conducted so far. We find that the remittances projected to be lost to the tax exceed 100 percent of US aid cut in 19 countries— and exceed 50 percent in a further four.

Figure 4. Estimated USAID ODA and US remittances lost to LMICs (US$ million)

How migrants will respond

Firstly, as assumed above, the tax may reduce the size and number of remittances. Manuel Orozco at the Inter-American Dialogue estimated that the originally proposed five percent tax could lead to a minimum 10 percent decline in formal remittances. Unsurprisingly, given the potential impacts, Mexico has pushed back against the tax, with President Sheinbaum describing it as “unacceptable.” However, Mexican migrants are likely to be more able to absorb the cost of the tax than their counterparts from elsewhere in Central America. Mexican migrants in the US send an average of 16.7 percent of income back to Mexico, but Guatemalans send an average of 45 percent, which suggests they probably have less financial cushion to absorb the extra cost and would have to send less.

Secondly, it may change the way migrants send remittances. BBVA highlights three ways in which migrants could avoid the tax: (1) ask people who have US citizenship to send money on their behalf; (2) use interbank transfers rather than remittance service providers; and (3) use informal remittance channels. One study commissioned by the remittance service provider Western Union considered the effect of an analogous five percent tax on inward remittance flows by the Philippines, and projected that it would lead to a total decline in remittances of 9.9 percent; a decline in formal transfers of 17.7 percent; and a rise in informal transfers of 21.6 percent. Informal transfers are already approximately 50 percent larger than formal channels; they can be cheaper and quicker, but are also more subject to abuse.

Thirdly, it may change migration patterns. One of the stated rationales for the tax is to reduce future irregular migration to the US. But remittances are normally spent on consumption, such as food, housing, and land, and in this way, remittances can reduce the need for emigration. However, there is also some evidence that remittances are used to support education and skills development (which are positively correlated with emigration) and even the costs of emigration itself. If this tax leads a family to receive less remittances, they may be unable to support further emigration—or be compelled to by any means necessary.

The tax is unlikely to have the effects sought by some champions. Migrants will likely find alternative, albeit riskier, ways to send remittances home, and given , it is unlikely future migrants will be deterred. Even if the tax works as intended, it will only bring in a small fraction of the roughly $150 billion in funding included in the measure for border security and immigration enforcement. Taxing money sent to low- and lower-middle-income countries could bring in $940 million a year but could cost those countries $2.5 billion a year in total.