Since last week, many Americans have observed a firestorm over the proposed building of an approximately 700-mile wall (not including large natural barriers) along the borders of Texas, New Mexico, California and Arizona. In a prelude to political gamesmanship, the Mexican president, Enrique Nieto, publicly insisted that Mexico would never pay for the cost of erecting a border wall.
Many critics, on both sides of the aisle, despite a clear signal from voter polls about prioritizing immigration and security, have estimated that the costs of the wall could run as high as $20 billion.
One way to overcome the objections of both Americans and Mexicans is to provide an easy pathway for financing and paying the cost of the wall with minimal or no effect to either side. Rather than erecting border toll booths or imposing tariffs on cross-border shipments, a more practical longer term solution may be the imposition of a minimal tax or fee on the burgeoning activity for dollar-based cash remittances sent back to Mexico from both legal and undocumented immigrants domiciled in the United States.
Approximately $24 billion in remittances was sent from the United States to Mexico in 2015, according to a Congressional Research Service study, up from $22 billion in 2010.
That amount would purchase 1.5 million cars or 30 million laptops, and $200 billion sent back to Mexico over the past 10 years would have purchased ten border walls.
U.S. remittance agents include banks, credit unions, post offices, money transfer operators, individual businesses, and chain stores (convenience stores, groceries, department stores). Home town associations, also known as “Clubes de Oriundos,” facilitate collective transfers and maintain social ties between U.S. workers and communities in their home country.
The remittance transfer agents have an exceptionally lucrative commission business by charging approximately 6% on every transfer. With transfers of $24 billion, the commissions amount to $1.4 billion a year.
I propose that the tax on remittances would range from 8% to 10% depending on the size and frequency of transfer. The tax on cash transfers could also be imposed on the $11 billion in remittances sent from the United States to the Central American countries of Guatemala, El Salvador, Costa Rica and Panama. This tax on remittances from Latin America would not only capture amounts generated by the “underground cash economy” within the U.S. labor market but could also provide an annual sum of $3.1 billion to finance the wall.
Remittances may well decline if the tax were to be imposed. However, if remittances were to decline by 33 percent, the United States could still be left with an annual sum of $2 billion for the wall. Further, funds spent in the United States rather than sent overseas would help the American economy.
In order to stop remittance agents from avoiding the tax, they could be penalized for non-compliance, as proposed by former Louisiana Senator David Vitter under the Remittance Status Verification Act.
Another variation of this tax regimen would be to legislate that 20% of all remittances be placed or directed into the purchase of ‘Wall Bonds’ as a way of avoiding the remittance tax. The bonds could be redeemed in 10 to 15 years. Many of the individuals, subjected to this remittance tax, could use the tax as credit on other taxes owed in Mexico or the U.S.
The border wall and the defense of sovereignty it represents, is similar to other walls we have seen throughout the world. From Israel to China walls have been critical in deterring invaders and terrorists. It’s part of the privilege for working within the richest democracy in the world with the greatest opportunities for creating wealth.
James Thornton is Managing Director of Kamuela Venture Partners in Issaquah, Washington.
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