Remittance tax could shave half point off GDP in some Latin American nations

UPI

29-05-2025

A 3.5% tax on money sent by people in the United States to relatives in other countries, including Latin America, would have a major impact on some of these nations' economies. Photo by RDNE Stock Project/ Pexels
ASUNCIÓN, Paraguay, May 29 (UPI) -- A proposed 3.5% tax on remittances from the United States could cost some Latin American countries up to half a percentage point of gross domestic product, sparking concern in nations where money sent to families back home account for a significant portion of economic output.
On May 22, the U.S. House of Representatives narrowly passed a budget bill 215-214 that includes a 3.5% tax on remittances sent by non-U.S. citizens. The bill still needs approval from the Senate. A vote has not yet been scheduled, but lawmakers are expected to move forward in the coming weeks with a goal of passing the bill before the July 4 recess.
The measure is part of President Donald Trump's proposed fiscal package known as the "Big Beautiful Bill" and would particularly affect countries like Nicaragua, Honduras, El Salvador, Guatemala, Haiti and Jamaica, where remittances account for between 17.9% and 27.2% of GDP, according to the U.N. Economic Commission for Latin America and the Caribbean.
Remittances are not only a vital source of foreign currency for these countries, but they also play a critical role in sustaining local economies, especially in rural and low-income communities.
Related How Donald Trump can short sell Mexico to become president
While the commission emphasizes that remittances do not resolve structural poverty, they serve as a financial lifeline for many families.
Remittances improve quality of life and provide access to essential goods and services. José Manuel Salazar-Xirinachs, executive secretary of the Economic Commission for Latin America and the Caribbean, said a remittance tax could reduce the amount those families receive or even discourage people from sending money altogether.
"The Inter-American Development Bank estimates that remittances reduce poverty by up to 5.8% in El Salvador and by 0.8% in Mexico. Put another way, poverty in these countries would be higher without remittances," Salazar-Xirinachs said.
In a country like Guatemala, which relies heavily on remittances from the United States, a 3.5% tax on those transfers could have multiple effects. One likely consequence is a negative impact on the balance of payments, which runs a yearly deficit and is offset in part by remittance inflows, Guatemalan economist Juan Roberto Hernández said.
A drop in the supply of dollars could also put pressure on the exchange rate and make imports of food, medicine and fuel more expensive. This would likely be accompanied by a decline in consumption and investment. In 2024, Guatemala received $21 billion in remittances, representing about 20% of its GDP.
The Inter-American Development Bank estimates that between 70% and 80% of remittances go toward basic needs such as food, housing, health and education.
"Any decline would likely contract domestic demand and hurt key sectors like retail and services, with consequences for tax revenues and overall growth," Hernández said.
In Mexico, although remittances represent a smaller share of GDP, the country receives the highest volume in the region -- $65.2 billion in 2024. Thousands of families could see their incomes reduced if the 3.5% tax takes effect, Salazar-Xirinachs said.
A study by the Center for Latin American Monetary Studies found that about 11% of Mexican households received remittances between July 2023 and August 2024. Those households received an average of $549 per adult recipient each month, a significant amount considering the country's minimum wage is about $450 per month.
Remittances from the United States to Latin America totaled an estimated $160.9 billion in 2024, a record for the region. However, while the total volume increased, growth slowed to just 5% -- the lowest rate in a decade due to limited labor mobility and slower job growth among migrant populations.
The Trump administration estimates that a 3.5% remittance tax would generate $22 billion between 2026 and 2034, an annual average of $2.7 billion, or roughly 0.01% of U.S. GDP and 0.03% of federal spending.
However, experts warn that revenue may fall significantly as senders shift to alternative transfer methods, including cryptocurrencies. Still, recipient families would most likely feel the impact through reduced remittance amounts or higher transfer costs, according to the U.N. economic commission.