One of the zanier responses to the influx of unaccompanied minors from Central America has been the call to tax or cut off remittances from the U.S. to those countries. The harder it is for undocumented workers to send money back home, the logic goes, the less likely they'll be to come here in the first place. An editorial in Investor's Business Daily highlighted another apparent benefit, "Taxing remittances would dry up what amounts to unauthorized foreign aid to these banana republics and pressure them to change their feudal systems."
It's indeed outrageous that U.S. companies and households would hire undocumented workers so that businesses can offer consumers lower prices and families can save money. I vote that we punish … the workers. And if they can't send money home, they probably wouldn't do anything stupid like try to bring their families here … or would they?
Let's be serious: Taxing remittances not only is ineffective and unfair, but also undermines one of the most important forces for global economic development. If you want to provide more incentives for undocumented workers to remain in their, um, "banana republics," you should be looking at ways to make remittances less expensive and more productive.
Consider the numbers involved: Remittances amount to more than four times the aid and almost three times the foreign direct investment that Central America receives. The $14.9 billion in remittances that Central America netted in 2013 also represents a big chunk of gross domestic product -- well over 10 percent in Guatemala and El Salvador, and 18 percent in Honduras -- that outstrips tax revenue. To put that in perspective, however, neither those amounts nor proportions of GDP make the top 10 of remittance recipients (At the apex, China took in $71 billion, and Tajikistan relied on remittances for 48 percent of GDP).
The challenge facing the nations of Central America is to generate more development bang for the remittance buck. Right now, more than 80 percent of remittances goes toward consumption rather than long-term investments, whether getting an education or starting a business.
Part of the problem is poor financial access: In 2011, for instance, only about 25 percent of adults in the two lowest income quintiles in Latin America and the Caribbean had bank accounts. Getting more people "banked" through initiatives such as the Inter-American Development Bank's Remittances and Savings Program has the potential to boost both saving and lending.
Through greater competition, it might also lead to lower remittance fees. In 2013, it cost 5.1 percent to send $200 from the U.S. to Central America. That rate is much lower than the global average of 8.9 percent, but it still represents about $760 million of the $14.9 billion sent to Guatemala, Honduras and El Salvador in 2013 -- or more than double what they'd get in additional U.S. foreign aid if Congress stopped bickering and agreed to President Barack Obama's pretty modest request.
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