By: Caroline Arkalji
During his presidential campaign, U.S. president Donald Trump promised to deport millions of unauthorized immigrants and restrict legal immigration to reshape border control policies. In his first few weeks in office, deportation flights dominated the news. One effect of the broader U.S. crackdown on both documented and undocumented migration is expected to be the decline of remittance outflows, with consequences for countries heavily reliant on these money flows. Proposals to tax remittance outflows may pose additional challenges. One such proposal by the new administration seeks to impose a 10% tax on remittances, which could impact other countries that rely heavily on these funds, including India, the top recipient of remittances. In 2023, India received over $125 billion, becoming the first to exceed 100 billion dollars.
In practice, remittances can be sent through various means, including formal and regulated institutions or channels such as banks, non-bank financial institutions, and money transfer operators (MTOs). Additionally, there are semi-formal and informal channels, such as hawala, an organized transaction system in the Middle East and South Asia, cash carried in person, or in-kind transfers mainly consisting of consumer goods delivered through informal channels. Undocumented workers often rely on MTOs, non-bank financial companies that facilitate cross-border fund transfers for remittances. The extensive networks of MTO outlets and transfer agents — including banks, post offices, and various intermediaries like retail shops, cell phone centers, travel agencies, drugstores, and gas stations — have more flexible identification requirements for delivering remittances to destination countries and focus on low-value and successive transfers.
Taxing remittances can increase compliance costs for formal channels, pushing more transfers into informal networks and undermining the business models of regulated providers. This creates spillover effects, where regulatory changes meant for non-banking financial institutions often lead to unintended consequences that impact the broader financial system. This phenomenon mirrors the side effects of post‑9/11 sanctions laws, commonly known as AML/CFT. By targeting financial security, these laws have led banks to "de-risk" by severing ties with high-risk entities such as money transfer operators, non-profits, and small businesses in low-income countries, pushing them toward less transparent financial avenues. Although both strategies aim to improve oversight and security, their unexpected outcomes can weaken the formal financial system and create economic barriers for vulnerable communities.
Remittances are vital for the economic stability of over 80 countries. Mexico, which has the largest unauthorized immigrant population in the United States — totaling about 4 million people — could be among the countries most affected, being the second-largest recipient of international remittances globally after India. Foreign remittances comprise approximately 4.5% of Mexico’s GDP, representing the country’s largest source of foreign income. A tax on remittances to Mexico could affect $65 billion annually, having the worst impact on states where poverty is accentuated, such as Michoacán and Guerrero, where remittances consisted of 15.9% and 14.1% of their GDP, each, as a result forcing many to transfer money through riskier alternatives.
For several Central American countries, particularly the Northern Triangle — which includes El Salvador, Honduras, and Guatemala — remittances are also a crucial source of income and foreign exchange. These nations account for 2 million unauthorized immigrants in the United States or about 18% of the total. Although remittance flows from the Northern Triangle are smaller in volume than those from Mexico, they represent a significant portion of these countries' GDPs; in 2023, El Salvador 24%, Honduras 26%, and Guatemala around 19%.
Policymakers in remittance-dependent nations must consider the broader, long-term effects of U.S. immigration and taxation policies. While designed to enhance security, generate revenue, or regulate financial practices, some of the proposed measures might unintentionally hurt vulnerable populations who rely on financial access the most and slow economic growth.
Caroline Arkalji is a Research Assistant for the Global Economics & Development and Energy & Climate Policy programs at ORF America.