Sat | Aug 19, 2017

Understanding the Border Wall Funding Act

Published:Monday | May 22, 2017 | 5:00 AMShanike Smart
US President Donald Trump
This undated rendering, provided by DarkPulse Technologies Inc, shows a proposed border wall between Mexico and the US. The wall would be constructed with ballistic concrete.
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Today, The Gleaner and The Caribbean Policy Research Institute (CaPRI) present the first in a monthly series focusing on current research being carried out by the institute and/or issues of particular national interest. Today's submission comes from CaPRI researcher Shanike Smart.

 

The Bill - A tax on remittances

 

The US Congress has introduced a bill cited as the Border Wall Funding Act of 2017 to impose a two per cent tax on remittance transfers from the US to certain foreign countries for "improving border security". The bill named 42 foreign countries "south of the US border", capturing almost all the Caribbean islands, including Jamaica.

 

JAMAICA AND REMITTANCES

 

Remittances are largely personal transactions from migrants to their friends and families. The importance of remittances can be observed at the level of households or at the level of the entire economy. According to the International Monetary Fund (IMF), Jamaica is among the top countries in terms of receipt of remittances from its diaspora. In addition to being one of Jamaica's top earners of foreign exchange, remittance inflows have contributed an average of US$2 billion annually, almost 17 per cent of GDP - the value of all the goods and services produced in the economy. This amounts to an average of approximately US$700 (almost J$100,000) per member of the population, per year.

Not only are remittances significant to Jamaica in terms of the amounts received, they also constitute an important form of income to the neediest of the society. According to a national survey done by the Planning Institute of Jamaica on remittance received in Jamaica for 2010, remittances were the only source of income for many households. A Bank of Jamaica survey of 2010 also found that approximately 85 per cent of remittances received are used to pay utility bills and to cover basic consumption expenses.

Remittances, therefore, are an important source of income for millions of families, and for Jamaica, like many other developing countries, its decline would have a serious impact on the ability of families to get health care, education and proper nutrition.

For more than a decade, the US has accounted for more than 50 per cent of the total remittances received by Jamaica. In 2015, the US contributed 64 per cent (or US$1.4 billion) of the US$2.2 billion sent to the country.

 

EFFECTS ON REMITTANCE TAX

 

Taxation on remittances would, in effect, further raise the cost of money transfers. A tax may be expected to not only reduce the amounts received by the recipients, but also to reduce the incentive to send in the first place. While the magnitude of the effect is uncertain, lessons from other countries have shown that an increase or decrease in the value of remittances is usually more than proportionate to the actual change in the fee and is said to have a multiplied effect. In the Philippines, for example, a study by the University of Colorado Boulder, done for Western Union, concluded that a tax increase of five per cent would cause an almost 20 per cent decline in their remittances. In addition, the Migration Policy Institute in 2004 reported that reducing remittance fees by five percentage points could increase annual remittance flows to developing countries by as much as $4 to $5 billion.

The imposition of the tax might also reverse gains made by remittance and money transfer brands in encouraging migrants to use legal, licensed, regulated and transparent channels of money transfer, as there is a risk that people will revert to sending money home through cheaper, informal methods such as in cash carried by friends and relatives.

A shift of flows to informal channels can hurt efforts to leverage remittances for increasing access of recipients to formal financial services (financial inclusion) and to raise financing for developmental initiatives such as infrastructure and other development projects.

Such informal 'grey' transactions are very difficult to track and monitor, and therefore present difficulties for successfully and effectively mitigating against financial crimes. It therefore hinders international efforts against money laundering, counterfeiting and terrorism finance.

 

Outlook

 

As there are still uncertainties around whether the bill will be passed and what exactly will form the basis for defining remittances and how broadly it will affect related businesses, the magnitude of the effects of this tax for Jamaica are still uncertain, which makes it difficult to make concrete recommendations.

The possible imposition of a tax on remittances, a cash inflow which the country and its neediest depend on, reinforces the importance of continuing our path of fiscal prudence initiatives currently being undertaken to strengthen the Jamaican macroeconomic environment. It is also important that efforts to bolster the growth initiatives continue, as it presents the most sustainable path for protecting the most dependent on these remittances, who are also the most vulnerable in the society.