Trump's 'One Big Beautiful Bill Act': How remittance tax plan might deliver a big economic blow to US allies?

Economic Times

20-05-2025

AP
This is not Trump's first attempt to tax remittances
A new tax has been proposed in the United States one that is aimed at these remittances specifically. A US bill proposes a 5% excise tax on any remittances that originate in the US to any other country.
The bill would levy a 5% tax on remittances for non-citizens and foreign nationals. That's on top of a roughly 5% to 10% fee already charged on the payments by senders like Western Union Co. and MoneyGram International Inc., services migrants in the US use to send money to family members back home. US President Donald Trump's 'One Big Beautiful Bill Act' would make sending money back home more expensive for thousands of Indian residents and non-resident Indians (NRIs) living in America.
A Republican proposal to tax remittances could deliver a significant economic blow to some of the United States' poorest neighbors, including key allies of Donald Trump. The proposed tax would directly target financial transfers that account for roughly one-fifth of El Salvador's GDP, according to Bloomberg.El Salvador's President Nayib Bukele, who enjoys close ties with Trump by accepting deportees into domestic custody, would face economic strain. Honduras — home to a US military base that facilitates deportations to Venezuela — is similarly dependent on remittances, with Guatemala not far behind.'This isn't good news for those who rely on remittances,' Carlos Acevedo, former head of El Salvador's central bank told Bloomberg. 'It could negatively impact economic growth.'
ALSO READ: Trump's 'one big, beautiful bill' offers $1k for newborns, immigration and tax cuts: 10-point explainerMigrants from El Salvador, Guatemala, and Honduras sent record levels of remittances last year, helping fuel economic activity in Central America. Since Trump's inauguration in January, remittance flows have surged as migrants, anticipating deportation, have increased the amounts they send home as these funds are vital for consumption among poor families with limited income sources. Mexico and Central America remain among the most remittance-dependent regions globally.'The impact is both macroeconomic and microeconomic,' said Alvaro Gonzalez Ricci, head of Guatemala's central bank. 'Remittances are increasingly important not just as a share of GDP but as a driver of household consumption.'Gonzalez Ricci noted that migrants in the US may bear the cost of the tax, minimizing its impact on Guatemala's remittance inflows. He added that states with sanctuary cities are likely to oppose the proposal.However, Manuel Orozco, a remittance expert at the Inter-American Dialogue in Washington, estimated the tax could reduce remittance volume and transactions by around 10%.'That's the best-case scenario,' he said. 'If implemented, many people could turn to cryptocurrency or ask U.S. citizen relatives to send money on their behalf.'
ALSO READ: Putin shocks Trump, says 'We like Melania better'; US President then shares his hilarious response Mexico's Foreign Affairs Minister Juan Ramón de la Fuente said the country would mount legal and political opposition to the proposal. In a May 13 letter to House members, Ambassador Esteban Moctezuma Barragán argued that the tax would amount to double taxation for migrant workers, who already pay U.S. income taxes. In 2021, Mexicans working in the U.S. paid $121 billion in taxes, the ambassador noted.'Taxing remittances would disproportionately impact the most vulnerable, ignoring their limited ability to pay,' Barragán wrote. 'These workers migrated out of necessity and contribute meaningfully to the U.S. economy. We respectfully urge reconsideration.'Officials from El Salvador and Honduras declined to comment on the proposal.The Electronic Transactions Association, representing digital payment providers, also urged lawmakers to reconsider their decision. The group warned the tax could harm unbanked populations who rely on cross-border payments and may push them toward unregulated financial channels.
ALSO READ: White House study raises alarm: 9 million Americans could lose health insurance in 'major' recession if... 'These services are essential, not luxuries,' the association said in a May 8 letter. 'They help people pay bills, support families abroad, and manage daily expenses. Taxing remittances punishes those who can least afford it.'This is not Trump's first attempt to tax remittances. A similar initiative during his first term failed due to legal and logistical issues in distinguishing between worker remittances and commercial payments, according to Barclays analysts Gabriel Casillas and Nestor Rodriguez.Oklahoma is currently the only US state with a remittance fee: $5 on wire transfers under $500 and 1% on amounts over that threshold. Introduced in 2009, the policy generated $5.7 million in its first year and $13.2 million in the latest fiscal year.If enacted, the renewed federal push could lead to currency devaluation in Guatemala, Honduras, and Mexico. However, remittance flows have proven resilient, even during crises like the COVID-19 pandemic. According to Barclays, such a tax would likely cause a short-term disruption rather than a long-lasting decline in remittances.
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The 'One Big Beautiful Bill Act' proposes a 5 per cent tax on all international money transfers made by non-US citizens, including non-immigrant visa holders (like H-1B) and green card holders. If passed, the law would withhold 5 per cent of the remitted amount at the point of transfer. No exemption threshold limit has been set, meaning it would even apply to transfers of small denominations.The section on remittances in the 1,116-page legislation, however, specified that the 5 per cent clause will not apply to any remittance transfer by a 'verified US sender', meaning if the sender is a US citizen or national of the United States. The law could come as a massive financial blow to nearly 45 lakh Indians living in the US, including nearly 32 lakh persons of Indian Origin.