Every year, billions of dollars are sent abroad from the United States to individuals in other countries. The money is not for investments or payment of services, but instead for the personal use of migrants’ relatives or friends. Remittances, as they are known, accounted for over $130 billion in outflows from the United States in 2016. The United States is the source of approximately one-quarter of the world’s remittances, mirroring its relative contribution to global gross domestic product (GDP).
Remittances to foreign countries—in absolute terms—are relatively small, accounting for less than one percent of U.S. GDP. However, this is money not being spent in America to support local industry. Perhaps more importantly, it serves as a means of undermining any meaningful assimilation, to the extent that is even possible; the allegiance of these foreign nationals is to their kith and kin in the home country, and remittance money is used to prop up their third-world economies.
In total dollars, several developed Europe countries are near the top of the list of destinations for remittance funds from America: Germany, France, and Italy, to name a few (Figure 1). Mexico, however, dominates the list with $28 billion in remittances in 2016, totaling 20% of all such transfers leaving the United States that year. Five countries—Mexico, China, India, the Philippines, Guatemala, and Vietnam—received almost half of the total remittances.
Figure 1. Remittances from the United States.
Perhaps the most striking statistic is the percent of GDP accounted for by remittances sent from the U.S. (Figure 2). Our Latin American and Caribbean neighbors in Bermuda, Haiti, El Savador, and Honduras derive greater than 15% of their annual GDP from migrants sending home cash; remittances to Jamaica, Guatemala, the Dominican Republic, and Nicaragua account for approximately 5-15% of their respective economies. Mexico—the largest beneficiary of remittances in absolute dollars—has immigrants in the U.S. to thank for 2.61% of its GDP.
Figure 2. Remittances as percent of recipient country’s GDP.
Wire transfers are one of the primary means of sending remittances. Such transmissions can be bank-to-bank (e.g., Bank of America to Santander Mexico; one individual bank account to another), cash-to-cash (e.g., MoneyGram or Western Union), or some combination thereof (e.g., PayPal). Gift cards are another option; open-loop cards (e.g., Visa debit gift card) are prepaid with cash and can be sent to another individual who may then use it like any major credit or debit card. Cryptocurrency (e.g., BitCoin) is an emerging method of remitting funds abroad, but current use is likely limited.
Having established the nature and scope of the remittance problem, below we will review possible means—and related pitfalls—to address the issue.
What can be done?
Tackling the remittance problem should focus on two goals: revenue generation and deterrence. Revenue, via a remittance tax, could be used to pay for the border wall and increase funding for Immigration and Customs Enforcement (ICE) and Customs and Border Patrol (CBP). A remittance tax, along with new bureaucratic hurdles, could also effectively deter transfers of funds to individuals outside the United States, allowing such money to stimulate local economies.
Revenue Generation: the Remittance Tax
A tax on remittances is not a fringe proposal. Fox News host Laura Ingraham recently tweeted in support of such a measure (Figure 3). We also have a successful, real-world example: the Oklahoma money and wire transmission fee (OS §63-2-503.1j). In effect for nearly a decade, the Oklahoma fee was adopted to combat money laundering and the illegal drug trade. Any purveyor of a “money transmission, transmitter or wire transmitter business,” under the law, must assess a flat $5 fee for the first $500 transferred and an additional 1% of any funds above $500. Any individual filing a tax return with a valid social security or tax identification number (SSN and TIN, respectively) may receive a tax credit for the entire fee. Thus, individuals without a SSN or TIN, or not filing an income tax return—such as drug dealers and illegal immigrants—will forfeit the entirety of the assessment.
Figure 3. Laura Ingraham tweets in favor of a remittance tax.
(Henceforth, “tax” and “fee” will be used interchangeably in relation to any levy on remittances).
The modest fee brought in over $13 million in fiscal year 2018, with only a small minority of residents applying for the income tax credit. The Center for Immigration Studies (CIS), reporting in 2015, states that 96% of fees are not claimed as income tax credits. Illegal immigrants and drug dealers are most certainly not benefiting from the tax credit; but if we assume tax-paying citizens of Oklahoma are also sending wire transfers, it appears most also do not follow through with the process for a refund.
As stated above, revenue generation should be one of the two goals when searching for a solution to the remittance problem. The Oklahoma fee takes in very little money—in absolute and relative terms—each year. The wire transmission withholding accounted for 0.1% of total state revenues in 2018 (Oklahoma Tax Commission Annual Report – 2018 [PDF]).
The Cato Institute—staunch defenders of open borders and international finance—wrote last year that a remittance tax would not raise enough revenue to fund the border wall. Despite any overall disagreements those on the dissident right might have with Cato, they do raise some important points and challenges:
1. Using the Oklahoma model, the U.S. government would raise only about $1.6 billion annually. Total revenues from individual taxes were $1.6 trillion in 2017, 0.1% of which would equal the number cited by Cato. Further, if the estimated annual remittances of $138 billion were taxed at 1%, the rate used by Oklahoma, the government would only collect $1.38 billion per year.
2. A higher could raise the money for the wall faster, but may result in a decline in wire transfers, and thus lower comparative revenues.
3. Half to three-quarters of illegal immigrants file tax returns, have money withheld from their paychecks, or both, which may entitle them to a credit for any levied transfer fees.
4. Given that only 4% of the credits in Oklahoma are claimed and that 20% of eligible Americans do not take advantage of the Earned-Income Tax Credit, many citizens—not just illegal immigrants—will likely end up paying the wire transfer fee.
5. Higher rates charged on wire transfers will force many remittances onto non-wire systems, such as cryptocurrencies or gift cards.
6. Illegal immigrants will also be able to rely on American citizens or legal immigrants to transfer funds. Cato notes about 16 million people live in households with the 11-12 million illegal immigrants in the U.S, and these individuals could aid the illegal aliens.
7. Remitters may turn to the black market. “Many unlawful immigrants entered the country illegally and some of them use fraudulent documents to work in the United States. Surely they will find a way to illegally remit funds if the tax is large enough.”
8. Remittances for special categories, such as foreign university tuition, would disproportionately impact American citizens.
While the Cato article raises valid concerns, possible solutions do exist. Point-by-point:
1. If we assume the entirety of the $138 billion in remittances from the United States is by wire transfer, simply using a rate higher than 1% will increase revenues, helping to fund the wall—and later ICE and CBP—at a faster rate. A wire fee of 2% would net $2.76 billion annually and a 5% fee would bring in nearly $7 billion.
2. A higher rate may indeed deter wire transfers; however, we should recall that deterrence itself should be one of our goals. What if that money is simply transferred by other means? See (5) below for some ideas.
3. Illegal immigrants filing tax returns, and thus perhaps being eligible for a credit for any remittance taxes paid, exposes yet another problem that must be dealt with. Why are illegal immigrants allowed to file tax returns and still remain in the country? If an individual does not have a valid SSN or TIN, he should not be able to file taxes; if he is using a false identification number, he should be hunted down, arrested, and deported. However, if illegal immigrants continue to file tax returns, it may simply be that the credit for remittance fees is either not available at all, is capped at a certain amount, or is only for a certain percentage of total remittance fees.
4. The problem exposed in point (3) is rendered meaningless if we rely empirical evidence. Again, in the case of Oklahoma, only 4% claim the credit for wire transfer fees; it is unlikely that the 50-75% of illegal immigrants who file taxes or have taxes withheld will come out to claim the credit that most in Oklahoma do not. We are still left with the issue of the fee being paid for by American citizens or legal immigrants. The latter do not concern us. A large portion of citizens could avoid the fee with one simple maneuver: only wire transfers to foreign countries will be assessed a fee; domestic transfers will remain tax-free.
5. Remittances moving to non-wire systems is perhaps the most problematic issue. Cryptocurrencies lack the regulation and taxability currently imposed on traditional money transfer institutions. A complex issue, the topic of blockchain currencies being used for remittances will need to be covered elsewhere. Regarding gift cards, an approach similar to that of wire transfers may be employed. According to Statista, gift card sales are estimated to reach $160 billion in 2018. Open-loop cards—prepaid and available to use at any retailer—reached $295 billion in 2016, with sales projected to reach $353 billion by 2020. Using a benchmark of $300 billion, a 1% tax on open-loop cards would net $3 billion per annum. Wire transfers in combination with open-loop cards would likely cover most of the market for remittances.
6. The U.S. does not need to specifically target, or rely upon, illegal immigrants alone to raise revenues from remittances abroad. Firstly, and most importantly, remittance taxes aimed at funds sent to foreign countries would not discriminate based on immigration status. Secondly, a non-refundable or partially-refundable fee would prevent illegal immigrants from using citizens or legal immigrants as a means to obtain credits for the remittance fees. Thirdly, as seen in Oklahoma, even citizens and legal immigrants are unlikely to take advantage of a tax credit.
7. Yes, remitters may turn to the black market. Beyond pure speculation, there is no way of determining the actual impact of such a change in the remittance market. As such, it will not be treated as a legitimate counterargument.
8. Transfers for foreign tuition, business expenses, good or services rendered, or investment need not be included in a remittance tax scheme. The object would be to tax transfers to foreign individuals; businesses could be easily excluded and the rare student abroad would simply need to provide proof of school enrolment.
Deterrence: Tax, Regulate, and Sanction
As shown above, a requisitely high remittance tax could raise revenue, but also deter transfer of funds to foreign nations. A wire-transfer tax of 2-5% may be enough to raise revenue without necessarily discouraging such remittances. A higher fee—perhaps around 10 percent—could raise money at a faster rate, but would be more likely to deter payments or encourage the use of other means, such as open-loop prepaid cards. Thus, a universal tax on open-loop cards could close the revenue gap while maintaining a certain level deterrence, though impacting American citizens at a greater level.
Various levies, regulations, and sanctions, while not necessarily aimed at enforcing a remittance tax, may help stem the outflow of money from the United States:
1. End all foreign aid to Latin American and Caribbean countries. Assistance in 2018 is planned to total $757.191 million, with Colombia, Haiti, Mexico, Guatemala, and Honduras being the top recipients (Figure 4). The aid funds could then be spent on construction of the wall and increased immigration enforcement.
Figure 4. Planned foreign aid to Latin America and the Caribbean.
2. Mandatory E-Verify for all businesses with twenty or more employees. Verification of identities and immigration status would reduce the likelihood of illegal immigrants claiming refunds for remittance fees and make employment more difficult, thus lowering remittances sent abroad.
3. Require a valid SSN or TIN (or state ID, if such an ID requires validation of citizenship or legal immigrant status to receive) to purchase money orders and open-loop gift cards. Positive identification as a citizen or legal immigrant will deter use of these means for sending remittances.
4. Add a $1 fee to all first class mail with a foreign destination. Outbound international first-class mail brought in $136 million in revenues in fiscal year 2013 [PDF], a decrease of nearly 60% from FY 2010. Thus, the fee would not likely generate significant revenue, but would serve as a deterrent for sending cash or gift cards abroad via mail.
5. Indefinitely suspend the new U.S.-Mexico trade agreement, close the U.S.-Mexico border, and threaten economic sanctions on Mexico and other Latin American countries as a means to force these countries to make internal policy changes regarding remittances and border security. The United States could leverage its economic might to make these governments fund the border wall with Mexico; introduce a fee on incoming remittances from the United States, to be spent on immigration control; and/or develop a multinational immigration and border enforcement alliance.
Each year, over $100 billion leaves the United States in the form of remittances from immigrants to family and friends in their native countries. A reasonable tax or fee on remittances abroad could fund the border wall—in whole or part—and provide indefinite revenue for ICE and CBP. A 5% fee on wire transfers abroad could bring in as much as $7 billion annually; adding a 1% tax to open-loop gift cards would generate another $3 billion per year. In just a year, the United States would raise enough revenue to pay for a third of the U.S.-Mexico border wall. Ending foreign aid to Latin America and the Caribbean, judicious use of sanctions and trade negotiations, and requirements for more widespread use of positive identification in employment and money services all could help both deter further outflows from the U.S. and raise the remaining funds for a border wall.
It is time for Congress and the President to act on these creative yet common sense proposals and keep U.S. dollars in the U.S.