What a 3.5% tax on remittances could do to the developing world

On May 22, the U.S. House of Representatives passed a draft of President Donald Trump’s new budget. Among the 1,038-page text is a proposal to place a 3.5% tax on financial transfers sent by non-U.S. citizens. These transfers, known as remittances, equaled $85.8 billion in 2023 just from the U.S., out of more than $800 billion globally, while official development assistance, or ODA, was $223.3 billion in the same year. “On a global scale, remittance flows have exceeded development aid and foreign direct investment,” said Marcela Escobari, a senior fellow at the Brookings Institution. Only the transfers sent by noncitizens or nonnationals of the United States will be impacted. This will require any remittance provider, typically a bank, to verify the citizenship of the sender. The provider is responsible for collecting the tax and then submitting it to the government quarterly. As aid budgets shrink, countries especially reliant on diasporas in the U.S. would be most impacted by such a tax. Nations such as Lesotho, Micronesia, and Eswatini are expected to lose over a third of their official development assistance from all donors. Yet remittances, which have surpassed ODA since the mid-1990s, have long served as a reliable alternative. If passed by the U.S. Senate, the tax will be a thorn in the side of one of the most valuable financial flows from the U.S. to low- and middle-income countries, especially impacting hard-to-reach parts of countries that typically struggle to access government-controlled development assistance. “For many years governments have sought to reduce transaction costs on remittance flows. This reversal will be distortionary, regressive, and expensive.” --— Marcela Escobari, a senior fellow at the Brookings Institution “In places where the government doesn't really have economic viability or programs to fit into the local communities, those remittances were lifesavers,” said Ariel Ruiz Soto, a senior policy analyst at the Migration Policy Institute. “Remittances create the opportunity for local projects that expand community services.” The policy would also impose a new administrative burden on U.S. banks and financial services, requiring them to validate citizenship in order to send money. Even if the tax is passed, remittances are unlikely to grind to a halt, experts told Devex. Individuals will look for other ways to send money, whether that’s by traveling with cash, using alternative unregulated methods like cryptocurrency, or asking U.S. citizens to send the funds for them. But the hurdles will slow the flow of money and create security concerns as a demand for new financial channels rises. Development impact Remittances have grown almost every year since they were first tracked in the 1970s. Flows to low- to- middle income countries increased by 5.8% in 2024 and are expected to increase by 2.8% in 2025, according to estimates by the World Bank. In Tajikistan, Tonga, and Lebanon, remittances account for more than 30% of GDP. “Until a few years ago, the world was singing praises of countries providing opportunities to people from low-income countries to work and send remittances and how those remittances helped jump-start the development process or contribute to it,” said Ijaz Nabi, the country director for Pakistan at the International Growth Centre, an economic research center based at the London School of Economics and Political Science. “But of course, the United States has an administration that doesn't see the world that way.” The value of remittances are especially obvious in hard-to-reach places that development funding doesn’t always touch, such as in Guatemala, where remittance recipients are mostly rural and rely on funds sent by friends and family for housing construction, education, and food. One town in the country’s western highlands even has a statue of a migrant waving goodbye and walking north. “Many migrants send a substantial portion of their earnings back home,” said Escobari. “Guatemalan migrants send home nearly 45 percent of their income. Within these countries, the poorest regions — often rural areas where families depend on every dollar sent — will feel it first.” In countries such as Mexico, India, and Pakistan, so many people travel abroad and send remittances that parts of the economy are reliant on this income. “It has a tremendously beneficial impact on household income, quality of life and medical access,” said Parikshit Ghosh, a professor at the Delhi School of Economics. Finding a way around the tax Migration experts said that the number of people carrying large quantities of cash across U.S. borders could rise. And that has its own complications. “It is risky and dangerous to go with $10,000 to your country of origin,” said Ruiz Soto. “You'll likely be a target of assault and it’s going to spur a whole clandestine business.” Ghosh said that it might “increase security risks in the U.S.” because it’s going to “reverse the trend of remittances flowing through official channels.” “For many years governments have sought to reduce transaction costs on remittance flows,” said Escobari. “This reversal will be distortionary, regressive, and expensive. Costs will increase for banks and providers as they check the migratory status of senders, and to our government, in increased bureaucracy to monitor and enforce millions of transactions.” She added that it will likely increase the chances of migrants getting scammed when they send money abroad. Cryptocurrency, which isn’t currently in the scope of this regulation, could be a way to evade the tax, said Manuel Orozco, director of the migration, remittances, and development program at the Inter-American Dialogue. He said that several crypto companies offer the service already. A new bureaucratic hurdle In order to enforce such a tax, private companies will have to verify citizenship. Orozco said that he’s not yet sure how the tax will be charged — whether it will be a retroactive tax credit or reflect immediately upon transfer — but that it’s likely to be a “nightmare” for the private companies responsible for verification. Orozco added that citizenship verification could be integrated into banking software. “This is the first time that I know of that a private entity is authorized to determine your citizenship status,” he said. “Who carries a passport, a birth certificate, or a certificate of naturalization on them? Those are the three documents you can use to prove citizenship in this country.” The tax could have other side effects that work against the priorities of the Trump administration. If wealth decreases abroad, imports of American products may also fall and a lack of income in home countries could increase the incentive to migrate, said Orozco. “The decision to migrate is complex and driven by various factors — people leave their homes in search of better opportunities abroad, or in response to shocks; a drought or natural disaster; a financial crisis or to escape violence and repression,” said Escobari. “Families often bet their life savings to come to America. A 3.5% tax will not change this calculus.” But, the International Growth Centre’s Nabi said that in the long term, there’s potential for a coalition of countries to come together and uphold the values of remittances for developing countries — whether that means a long-term shift in migration patterns or a global agreement that mitigates the impact of the tax. “The U.S. might make up 25% of the world economy, but if the rest of the 75% acts in some rational framework of globalization that existed before Trump became the president of the United States, then the impact of this in the long term can be substantially reduced.”