The Hidden Costs of America’s Proposed Remittance Tax on Immigrants
Former JPMorgan Chase Global Chief Economist (Ph.D in Economics) & Current Global Keynote Speaker
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To raise revenue and address growing nationalist sentiment, a new 3.5% federal tax on remittances sent by non-U.S. citizens to other countries has been included in the Big Beautiful Bill Act, which the House of Representatives passed on May 22, 2025. It is currently pending in the U.S. Senate. While this tax may seem minor in percentage terms, its ripple effects on global financial flows, immigrant communities, and the businesses facilitating cross-border money transfers could be significant and long-lasting. Initially proposed as a 5.0% levy, intense lobbying and economic analysis resulted in a compromise rate of 3.5%. However, even this reduced rate threatens to reshape the multi-billion-dollar remittance market.
The Political Retreat
Heavy lobbying from groups representing money transfer companies successfully convinced the administration to lower the remittance tax from its original proposed figure of 5.0% to the current proposed rate of 3.5% included in the Big Beautiful Bill Act passed by the House of Representatives in May 2025.
While the idea of a remittance tax first gained traction in late 2024, other studies from the Center for Global Development and a study by Ahmed, Mughal, and Martinez-Zarzoso find that every 1.0% increase in the remittance tax generates a 1.6% drop in remittance volume.
The negative political backlash from immigrant communities and remittance-reliant countries—notably Mexico, India, the Philippines, and China—along with coordinated lobbying by the remittance industry, led to the tax being scaled down to 3.5%.
Who sends the money and who receives it?
The most impacted countries—Mexico, the Philippines, India, and China—collectively receive tens of billions of dollars annually from their diasporas in the United States. The United States is the single largest source of remittances globally, sending over $74 billion in 2023 alone. For Mexico, remittances exceeded $60 billion in 2024, nearly 4% of its GDP. The Philippines relies on remittances for approximately 9% of its GDP. At the same time, India and China also heavily depend on these flows to support households, fund small businesses, and indirectly sustain social services through improved household consumption.
Source: Center for Global Development
The World Bank estimates that worldwide remittances reached $818 billion in 2023, which was four times the total development assistance that OECD countries contribute each year.
Worldwide Remittances
Source: The Board of Governors of the Federal Reserve System
Reduced Volumes and Informal Channels
The unintended consequences of the remittance tax are already becoming apparent. A widely cited February 2025 study by Ahmet et al. (mentioned above) finds that a 3.5% remittance tax would result in a 5.6% reduction in remittances sent from the U.S. by immigrants. This projected decline reflects not only reduced transfer activity but also the migration of financial flows into informal or unregulated channels to avoid taxation.
Among these are:
Human mules: Some migrants may resort to physically transporting cash across borders, thereby increasing security and legal risks.
Proxy transfers: U.S. citizens (who are exempt from the remittance tax) may be used to send money on behalf of non-citizens.
Stablecoins and crypto transfers: Perhaps the most disruptive workaround is the growing use of stablecoins, such as USDC or Tether. These digital tokens are pegged to the U.S. dollar and operate outside the traditional financial system. Since current regulations do not fully cover peer-to-peer crypto transfers, taxing them presents a formidable challenge for authorities.
The use of decentralized digital currencies could soar, undercutting both tax revenue and the business of established money transfer firms.
Rising Costs for Remittance Firms
For companies like Western Union, MoneyGram, and Remitly, the remittance tax is not just a pass-through cost—it represents a significant operational and compliance burden. These firms are now tasked with:
Verifying citizenship: Using government IDs, passports, or national databases to verify whether a sender is a U.S. citizen.
Safeguarding personal data: Complying with strict privacy standards and data protection regulations (e.g., GDPR for dual citizens abroad).
Withholding the remittance tax: Accurately calculating the 3.5% levy and ensuring the funds are remitted to the IRS.
Maintaining audit trails: Ensuring complete documentation in case of IRS scrutiny.
A Blow to Development and Global Equity
The impact of a reduced remittance flow extends beyond immigrant households. This makes remittances a critical pillar of financial stability and poverty alleviation in developing countries.
Slashing these flows via taxation may disproportionately harm the very people foreign aid programs aim to help—rural families, small businesses, and healthcare recipients in the Global South.
Global Development in Reverse?
A March 2025 update from the Center for Global Development Model (mentioned above) expects remittance declines of:
Mexico: -6.1%
Philippines: -5.8%
India: -5.4%
China: -4.9%
These figures are deeply concerning given that remittances often exceed foreign direct investment and aid in these economies. These remittances support education, healthcare, and housing sectors where government support may be lacking.
Policy Tradeoffs and the Bigger Picture
In contrast, proponents argue that the remittance tax will generate hundreds of millions in new revenue annually and encourage greater assimilation by incentivizing savings and investment within the U.S. economy. Although the Ahmet study (mentioned above) suggests that the elasticity of remittances is high, meaning that small tax increases lead to disproportionately large declines in volume, other studiesexpect sizable revenue opportunities. The nonpartisan Joint Committee on Taxation estimates that the 3.5% remittance tax will bring in $22.2 billion from 2026 to 2034.
Still, some of the net gain in tax revenue may be offset or even reversed by falling volumes and rising enforcement costs. Other broader political and diplomatic costs to consider might be strained relations with key allies and trading partners, which could outweigh some of the benefits of increased tax revenues.
Summary and Concluding Thoughts
What began as a seemingly modest tax on remittances for non-citizens is now set to reshape a multibillion-dollar global financial artery.
While some view it as a new potential source of U.S. tax revenue, others see it as a non-reimbursable increase in costs for legal money transfer businesses, which may drive U.S. immigrant workers to send money through unregulated and potentially unsafe channels.
For developing nations, the negative fallout may mean weakened social safety nets and increased inequality.
I will leave it to the reader to decide which of these factors is most important to them so that they can determine whether the remittance tax is an idea worth pursuing by the United States.