The Trump administration's proposal to impose a tax on money sent from the United States to foreign countries is poised to severely affect low-income families in Central America, potentially driving migrants to rely on informal and covert means to transfer funds to their relatives.

The tax legislation, recently passed by the U.S. House of Representatives, includes a 3.5% tax on remittances made by individuals who are not U.S. citizens or permanent residents.

This initiative is part of a broader strategy aimed at curbing illegal immigration and deporting approximately 11 million undocumented immigrants currently residing in the U.S. The United States is the largest source of remittances globally, with expatriates sending over $656 billion abroad in 2023, according to a World Bank report.

Experts note that there are several ways to circumvent this tax.

Migrants might request assistance from U.S.-citizen friends or family to send money or turn to cryptocurrencies, as well as relying on the informal money transfer market, often referred to as 'hawalas', which could serve as intermediaries for transferring funds.

This tax is expected to increase the costs of remittances for expatriates.

Andrew Selee, president of the Migration Policy Institute, stated that the tax is fundamentally detrimental to the poorest.

Mexico stands to be among the biggest beneficiaries of remittances sent from the U.S., receiving $65 billion last year, equivalent to around 4% of the country's GDP, surpassing all foreign direct investment.

Claudia Sheinbaum, the Mayor of Mexico City, has publicly criticized the U.S. tax, labeling it discriminatory, and sent a delegation of lawmakers to discuss the matter with their American counterparts earlier this month.

However, experts from BBVA bank estimate that the new taxes will have a minimal impact on the country's current account.

Jesús Cervantes González, head of economic statistics at the Latin American Monetary Studies Center, indicated that Mexican migrants might be better positioned to absorb extra costs compared to migrants from other nations, suggesting that they can adjust to the tax's impact without it significantly reducing their remittance volumes.

In Central America, politicians have not publicly addressed the issue as prominently, although countries like El Salvador, Guatemala, and Honduras rely on these remittances, which cover at least one-fifth of their GDP. William Jackson, a senior emerging markets economist, pointed out the astounding figures involved.

He cautioned that the likely outcome would be a reduction in domestic incomes and consumer spending, which could lead to a deterioration of the current account.

Initially, the tax was proposed at a rate of 5%.

At that level, it was expected to generate approximately $22 billion by 2034, according to projections from the Joint Committee on Taxation.

However, the underlying motive for this tax appears to be creating more challenging conditions for undocumented immigrants in the U.S. Cervantes González mentioned that Guatemalans and Hondurans could be more adversely affected because they remit a significantly larger share of their incomes while facing harsher economic conditions, noting that a larger percentage of migrants from these countries are undocumented.

Measuring the exact impact of this tax will be complex.

Many experts believe that numerous factors will influence remittance flows, including the economic slowdown in the U.S., prior increases in remittance sending coinciding with Trump's presidency, and the intensifying crackdown on mass deportations.

Ricardo Barrientos, director of the Central America Financial Studies Institute, stated, "There may be an impact, but I'm not sure if it will present itself at the aggregate level."

Illegal crossings into the United States have reached their lowest levels in decades; however, during the Trump administration, the rate of deportations has been lower compared to his predecessor, Joe Biden.

The larger question remains whether Trump can execute the mass deportations he has pledged.

Barrientos remarked, "As long as the migrant is in the United States, they will find a way to send money, as it is a lifeline for them and their families."