Thursday, August 15, 2019

To Pay For a Wall, Tax Remittances

Without fail, Donald Trump’s biggest applause line during the 2016 election cycle was his promise to erect a wall along America’s southern border and make Mexico pay for it.  During his successful White House bid, Trump did not produce a slew of wonkish policy proposals, but how Mexico would pay for the wall was addressed with specificity. 

Trump promised that if elected on day 1 his administration would amend regulations requiring proof of lawful residence before allowing outgoing wire transfers to Mexico.  The calculation was that threatening to restrict remittances would “encourage” Mexico to make a one-time payment of $10 billion to pay for the wall’s construction.

Hitting Mexico in the wallet would ostensibly provide the leverage needed to fulfill his most audacious—and popular—campaign promise.  In 2013, $22 billion were remitted to Mexico from the U. S. Total remittances to Mexico topped $31 billion in 2018.  “It’s an easy decision for Mexico,” said Trump in 2016.  “Make a one-time payment of $5-10 billion to ensure that $24 billion continues to flow into their country year after year.”

Trump could have imposed these policies by Executive Order, but for reasons that remain mysterious the changes were not implemented.  Legislation to tax remittances also stalled in the Republican-controlled Congress.  In 2017, Rep. Mike Rogers (R-AL) introduced the Border Wall Funding Act, which would have imposed a 2% tax on all person-to-person wire transfers to Mexico, Latin America and the Caribbean.  An earlier proposal in the Senate, which never made it out of committee, would have imposed a 7% fine on remittances if the sender could not prove that they are in the U. S. legally.

Because of the great migration of recent years, remittances are increasingly vital to many Third World countries.  According to the World Bank, remittances to low- and middle-income countries reached a record high in 2018, up nearly 10% from 2017.  In the United States alone, an estimated $148 billion was wired to individuals in other countries.  While Mexico is the largest beneficiary, China receives $16.1 billion while India tips the scale at $11.7 billion.  Remittances are also a significant source of wealth for Central America, ranging from 21.1% of El Salvador’s GDP to 12.1% of Guatemala’s.  One wonders why these regimes would work to thwart migration to the United States.  

That raises the question of why remittances are not taxed.  How often do politicians ignore a $150 billion dollar pile of cash?  Why the U. S. government does not tax remittances and why it does not prohibit foreign nationals on public assistance from sending cash home is one of the oddest phenomena in the immigration discussion.  Money flowing from the United States, whether to Mexico, China or the Philippines, does not support American truck drivers or waitresses and provides no benefit to local governments that frequently bear the cost of illegal immigration.

The state of Oklahoma provides an object lesson for how such a tax might work.  All out-going, out-of-state, person-to-person transfers of money are charged a 1% fee.  Technically this is not a tax but a deduction.  If the transmitter pays state income taxes, they can use these deductions as tax credits, effectively refunding the fee.  But according to state tax officials, 96% of the wire transfer fees are not used as income tax credits meaning that the revenue is taken from people who do not pay state income taxes. 

In a dismissive piece posted by the Cato Institute, Alex Nowrasteh says the fee raises a mere $133.65 per illegal immigrant.  But is this an insignificant sum as Nowrasteh implies?  A team of Yale and MIT researchers led by Mohammad M. Fazel-Zarandi produced a study estimating that there are 22.1 million undocumented immigrants in the United States.  According to the report, the number of illegal aliens could be as low as 16.5 million or as high as 29.1 million. 

Assuming that remittances from those outside of Oklahoma are similar to Oklahoma residents and assuming 22.1 million illegal immigrants, such a tax would yield nearly $3 billion in revenue.  Doubling the tax to a mere 2% increases the take to $6 billion. 

For decades, the federal government has failed to protect the border.  Politicians and business interests have turned a blind eye, thwarting the will of a majority of Americans who demand secure borders.  Taxing remittances is a means of accomplishing the goal that also shifts the costs to immigrants, including those here illegally.  Not only can a wall be built, but a stream of money to pay for border security and enhanced internal enforcement will have been established.  What’s not to like?


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