Can we fund the partly see-through wall by taxing worker remittances?
Given that tax reform cannot really force Mexico specifically to finance the wall/fence , it pays to see what other options are available. One option mentioned by President Trump on the campaign was to impose restrictions on worker remittances back to Mexico.
Figure 3 from CRS (2016), modified by author.
There are several reasons why remittance taxes are bad from a general efficiency and development context. However, in terms of the question at hand, here are two particularly salient concerns (from Mohopatra (2010)):
- A remittance tax would also drive these money flows underground. 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 infrastructure and other development projects …
- Such a tax is difficult to administer as remitters can resort to using informal channels. Also such a tax is highly regressive. And they produce huge deadweight losses as remittances are highly cost-elastic.
How much can a tax on remittances raise? In estimating the revenue gain, a key question surrounds the elasticity of formal sector remittances with respect to the tax. A low estimate of the elasticity of substitution between formal/informal remittances ranges from a low at 4, and a high at 8 (Light and Lewandowski (2015), pp.13-15). Note that this is not an overall remittances elasticity, just that for formal remittances that can be taxed. From Light and Lewandowski (2015):
The elasticity of substitution described here should not be confused with the price-elasticity of demand for remittances overall. The price-elasticity of demand for remittances is the change in total remittance demand compared to a unit change in price. Such an elasticity has been found to be relatively low, less than one. The elasticity of interest here, is the demand elasticity for (taxed) formal remittances only. This elasticity is much higher, because it includes both, the own-price elasticity of demand, plus the elasticity of substitution between alternative methods.
Armed with the relevant parameter, we can now proceed.
Let’s say remittances are $25 billion (assuming the 2016 number was driven by fears of a Trump Administration crackdown), a 10% tax is imposed, and the elasticity is low, then formal remittances decline by 33%, and $1.7 billion in revenue is raised. If instead the elasticity is 8, then formal remittances decline by 55.1%, and $1.1 billion in revenue is raised.
Estimates for the cost of building the wall range from $12 to $40 billlion . This means that it will take some time — well, years — to fund the wall. Of course, there is a maintenance cost associated with the enhanced wall. For extensive details on walls/fences/maintenance costs, see CRS (2009).
Of course, I am not addressing the collateral damage associated with imposing capital controls –- for instance, how much will foreigners want to put their assets in the US if the Trump Administration is willing to impose capital controls (see impact on the Chinn-Ito index discussed here)?
Next part: A Tariff to Fund the Beautiful Wall/Fence