As Wall Street continued digesting the myriad line items in the 1,000-page budget bill that passed recently, one part has triggered an especially acute case of heartburn.
Section 899 of the “One Big Beautiful Bill” moving through Congress has raised growing alarms, after the once-obscure provision was initially overshadowed by the budget’s estimated impact on the deficit.
It has been dubbed the “revenge tax” because it would increase rates for individuals and companies from countries with tax policies branded as “discriminatory.” That means foreign investors, who own trillions of dollars in U.S. assets, could face higher levies on passive income like dividends and interest payments.
“We see this legislation as creating the scope for the US administration to transform a trade war into a capital war if it so wishes, a development that is highly relevant in the context of today’s court decision constraining President Trump on trade policy,” Saravelos wrote in a note.
He pointed out that Section 899 uses taxation on foreign investors as leverage to advance U.S. economic priorities and only has to meet a low bar before it can be enforced.
It would also make covering deficits more difficult by lowering the de facto yield foreign government earn from U.S. Treasury bonds by nearly 100 basis points, Saravelos estimated.
While the ultimate impact could be less than that, the mere introduction of more uncertainty and complexity around investing in U.S. assets “undermines the attractiveness of dollar inflows at a time when this is already put in to question,” he warned.
“It is not unreasonable for the market to conclude that if the President is constrained on using trade policy, taxing foreign capital could be a new means of leverage,” he added.
Meanwhile, the Joint Committee on Taxation, the nonpartisan tax scorekeeper for Congress, echoed some of Wall Street’s fears.
