How do Remittances Impact an Economy?
When an individual sends money earned in the United States to friends, relatives or business associates still living abroad, that money is taken out of the U.S. economy and injected into a foreign economy.
IMPACT TO THE U.S. ECONOMY
Rather than being used to purchase goods and services in the United States, the majority of remittance monies go directly into the pockets of foreign businesses. A smaller portion of remittance payments indirectly wind up in the coffers of foreign governments through duties imposed upon the cash transfer itself or taxes on the goods and services purchased with that cash.
The money sent abroad is typically disposable income (that would often be spent on small luxuries). These small luxuries are subject to sales taxes, restaurant taxes, excise taxes, resort taxes, etc., known as “consumption taxes” (taxes levied on money spent, rather than upon money earned). Most state and local governments rely on consumption taxes to provide the revenue necessary to maintain roads and fund important services such as fire and police protection. When immigrants remit portions of their income to other countries, it places more pressure on the local jurisdictions in the states where they reside to make up that lost revenue elsewhere. This often results in higher overall taxation rates.
Furthermore, local businesses suffer because those who send remittance payments abroad typically end up with less disposable income. Money sent to other countries means less money to spend on goods and services in the communities where foreign-born individuals live.
According to 2017 data gathered by the Census Bureau, the median annual income for a household headed by someone born in the United States is roughly $61,987.[6] On the other hand, households headed by someone born outside the United States earn approximately $57,273.[7] That may seem like a small difference. However, according to the Center for Immigration Studies, 63 percent of non-citizen households access welfare programs, compared to 35 percent of native households do.[8] That means immigrants are more likely to consume public services, but due to lower incomes, pay a smaller share of the costs for those services.
That problem is compounded by the fact that many immigrants send a significant percentage of their lower salaries abroad. According to the Center for Latin American Monetary Studies, Central American and South American immigrants send anywhere from 17 percent to 30 percent of their lower salaries abroad.[9]That income is removed from the U.S. economy. Therefore, it no longer generates any tax revenue that can be used to pay for public services.