Trump's tax on remittances from the poor

US President Donald Trump seems determined to fill the American coffers at the expense of other countries and the world's most vulnerable people. In addition to cuts in foreign aid and steep tariff increases , his administration's "big, beautiful bill" introduces a new 1% tax on remittances sent from the United States and paid with physical instruments (such as cash, checks, and money orders). This " tax on the poor ," as Mexican President Claudia Sheinbaum calls it, will generate serious economic and social costs for developing countries.

Over the past three decades, the amount of money sent by migrant workers to family and friends in low- and middle-income countries (LMICs) has increased more than 17-fold , reaching $685 billion in 2024 (more than the sum of official development assistance and foreign direct investment). Remittances now constitute at least 3% of GDP in more than 77 countries and far exceed the World Bank Group’s annual lending to developing countries ($128 billion ) and the total outstanding loans owed to the International Monetary Fund ($145 billion ).

This enormous growth implies a fundamental shift: remittances have become the most direct and dynamic link between migration and development, acting as a source of foreign exchange and a force for macroeconomic stabilization in developing countries. The new 1% tax introduced by Trump jeopardizes this global progress and further increases the opportunity cost of brain drain.

The justification for Trump's new tax is similar to the one he used for the trade war. Just as the growth of US imports outpaced that of exports and widened the trade deficit, outgoing remittances also grew faster than incoming ones. For example, in 2012, approximately $200 billion left the US in the form of remittances, while only $7 billion entered, representing a 34% increase in net outflow compared to 2017. The US is already the leading source of remittances , with no fewer than 134 recipient countries in 2021 (the last year with reliable bilateral data).

Remittances already constitute no less than 3% of GDP in more than 77 countries, and far exceed the World Bank Group's annual lending to developing countries.

Trump's new tax will have far-reaching consequences. In the US, it is expected to discourage immigration, deter unauthorized employment, and reduce the net outflow of resources. Preliminary estimates indicate that the tax (which will apply to anyone sending remittances, regardless of their immigration or citizenship status) will generate slightly less than $10 billion in revenue over the next decade. And those who share Trump's zero-sum thinking ("money sent abroad is money not spent on local goods and services") even argue that it will boost consumption and growth within the US.

But the global implications are more worrying. Transaction costs are a proven and significant predictor of the volume of formal remittances; therefore, Trump's tax will reduce this outflow. A decrease in remittances, coupled with cuts in international aid, could cause local currency depreciation, inflationary pressures, and exacerbated macroeconomic instability in developing countries. These risks are particularly serious for heavily indebted countries, which will be more vulnerable to disruptions in trade and capital flows.

In the most vulnerable low-income households, remittances are also important at the microeconomic level, as they allow households to maintain more uniform consumption, cope with economic crises, and invest in health and education—all crucial elements for reducing poverty and improving well-being.

Data from developing Asian economies show that a one percentage point increase in international remittances as a share of GDP can reduce the poverty gap ratio by 22.6%. Similarly, a study of 122 developing countries between 1990 and 2015 found a reduction in malnutrition and infant mortality rates following a 10% increase in per capita remittances.

A decrease in remittances, coupled with cuts in international aid, can cause local currency depreciation, inflationary pressures, and worsening macroeconomic instability in developing countries.

Trump's tax on remittances could not only undo these advances, but also run counter to thecommitment made by the international community (within the United Nations Sustainable Development Goals) to reduce remittance transfer costs for migrants (which averaged 6.4% at the end of 2023) to less than 3% by 2030. The increased fees will lead migrants to use informal channels (such as cryptocurrencies and the hawala system) and could expand the black market for these services, with the significant risks associated with them.

The only positive thing that can be said about Trump's new tax is that it highlights the risks that relying on remittances to sustain economic development and finance essential items like food, education, healthcare, and housing poses to developing countries. While a sustained flow of remittances reduces the opportunity cost of brain drain, it does not address its underlying causes.

The solution lies in developing countries designing economic strategies that promote broad-based growth, job creation, closing technological gaps, and improving productivity. To move up the global value chain and generate lasting prosperity, these countries will still need their emigrants, but for their technical knowledge and scientific expertise, not just their money. By contributing to the "circulation of brains" and technology transfer, emigrants can simultaneously promote development in both their countries of origin and their host countries.

This dual benefit depends on improving the investment climate for private companies and deepening regional integration, so that developing countries with migration (DGMs) can leverage economies of scale to foster robust economic growth and long-term sustainability. To create a more favorable business environment, authorities must strengthen regulatory institutions and standards, improve accountability and governance, and address obstacles such as financial repression and infrastructure deficiencies. This will also encourage the use of remittances for long-term investments (not just consumption). Furthermore, DGMs could diversify their funding sources by creating lower-interest bonds for migrants.

The Trump administration's tax on remittances is just the latest in a series of punitive US measures against developing countries; more are sure to follow. Developing countries must recognize the need to break the cycle of dependency and create a virtuous circle of technology-based growth that builds economic resilience, fosters shared prosperity, and mitigates migration pressures.