Remittances are more than just financial transactions, they are a lifeline for millions of families, a catalyst for economic empowerment, and a key driver of sustainable development.

So, it is concerning to see these international transfers put at risk – especially so soon after mammoth cuts to foreign aid in recent months.

But a consequence of US President Donald Trump’s “One, Big, Beautiful Bill”, signed into law this month, will be to impose a sweeping new 3.5 per cent tax on financial transfers sent outside the country by non-US citizens. This is a measure that will impact millions of people, primarily diaspora and immigrant populations.

The Centre for Global Development (CGD) believes the tax will not only reduce the amount of money sent through formal channels by diverting a portion towards the tax but that it will also discourage remittances altogether. The CGD estimates this could lead to a 5.6 per cent drop in remittances. If the tax is implemented, Mexico alone stands to lose over US$2.6 billion per year.

In 2023, remittances sent from the United States totalled more than $85 billion, almost $12 billion more than US official development assistance

Many low- and middle-income countries are already dealing with the fallout from recent cuts from the dismantling of the US Agency for International Development, USAID, slashing more than $60 billion of funding for the world’s most vulnerable people.

The hardest hit countries will be those who rely heavily on both aid funding and remittances. For example, prior to the USAID cuts, 40 per cent, or $950 million of official development aid received by Somalia came from the United States. In 2023, members of the Somalia diaspora sent $1.73 billion in remittances. While only a portion of this would have flowed from the United States, it is a figure that exceeds all humanitarian and development assistance to the country and comprises a considerable portion of the country’s economy. According to aid organisation Oxfam, remittances helped many Somalis survive the horrific 2011 drought and remittances continue to help many families pay for food, water, education, and basic health services.

For some of the countries – including large middle-income countries such as India, China and Vietnam – the impact of the remittance tax will far outweigh the impact of aid cuts. In 2023, India received $118 million from USAID but $119 billion in remittances. The Centre for Global Development estimates this will fall by approximately $586 million as a result of the remittance tax.

So, if the tax does go ahead, can Australia and other countries help plug this gaping hole?

The UN Sustainable Development Goals aim to reduce the cost of remittances to less than 3 per cent by 2030. In 2022, senders from G20 countries sent more than $200 billion in remittance and paid nearly $12 billion in fees.

Anything that governments can do to reduce costs of sending money overseas would have outsize effect. Tonga, for example, received around $85.5 million in remittances from the United States in 2021. The US remittance tax is estimated to reduce this by $4.78 million per year. A reduction of 3 per cent in transaction fees in Australia would save remitters almost A$13 million per year, equivalent to Australia’s ODA to the country in 2020–21 and far more than what will be lost due to the tax.

Increasing awareness of lower-cost options for sending remittances would also have a significant impact. For example, Tongan households and the economy could gain more than 2 per cent of remittances if Tongan migrants in New Zealand switched from higher-cost to lowest-cost providers.

In an environment in which aid must be stretched further, remittances are a lifeline. Implementing a tax on remittances on top of cuts to aid spending is a double whammy that will be felt by millions.

Source: The Interpreter