Buried deep in the more than 1,000-page
The item — introduced in legislation that passed the House last week as Section 899 and titled “Enforcement of Remedies Against Unfair Foreign Taxes” — calls for, among other things, increasing tax rates for individuals and companies from countries whose tax policies the U.S. deems “discriminatory.” This includes raising tax rates on passive income, such as interest and dividends, earned by investors who are potentially sitting on trillions in American assets.
Cloaked in technicalities, the implication of the “revenge” measure, as it’s becoming known, is clear to analysts: If signed into law, it would further drive away foreign investors at a time when their once-ironclad confidence in Treasury bonds and other U.S. assets has already been shaken by Trump’s trade policies and the nation’s deteriorating fiscal accounts.
“We’re already dealing with a market where Treasuries, to foreign investors, probably aren’t the most attractive investment,” said Michael Brown, a strategist at Pepperstone Group, a brokerage firm founded in Melbourne whose clients are all outside the U.S. Brown said he got so many inquiries from concerned clients that he cobbled together a report breaking down the measure. “If you’re now talking about massively unfavorable tax treatment, then it’s just another reason to stay away.”
Among those potentially affected: institutional investors including sovereign wealth funds, pension funds and even government entities, as well as retail investors and businesses with U.S. assets.
The proposed tax is separate from Trump’s
The provision amounts to the “weaponization of U.S. capital markets into law” that “challenges the open nature of U.S. capital markets by explicitly using taxation on foreign holdings of U.S. assets as leverage to further U.S. economic goals,” George Saravelos, head of FX research at Deutsche Bank AG, wrote in a report on Thursday. “We see this legislation as creating the scope for the U.S. 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.”
Section 899 takes aim at countries including Canada, the U.K., France and Australia that impose “digital services taxes” on large technology companies such as Meta Platforms. The clause also targets countries using provisions in a multicountry deal for minimum corporate taxes.
The measure would boost the federal income tax rate on passive U.S. income earned by investors and institutions based in the targeted countries, first by five percentage points, then rising by another five points each year to a maximum of 20 points above the statutory rate.
‘Troubling’ for bonds, the dollar
Morgan Stanley’s strategists included the provision in frequently asked questions related to the tax-and-spending bill and concluded that Section 899 would weaken the dollar and European stocks with U.S. exposure. Gilles Moec, the chief economist at AXA Group, said it could add to the pressure on long-term interest rates, which this month touched multiyear highs. Others see it dragging on the U.S. currency.
“It indeed sounds troubling,” said Rogier Quaedvlieg, senior U.S. economist at ABN Amro Bank. “By limiting new foreign demand, that would of course put pressure on the dollar.”
The risks related to the Section 899 provision are seen by some as even more pressing after the U.S. court order on Wednesday that blocked many of Trump’s tariffs on imports. Tariffs are considered a key source of revenue to fund Trump’s tax cuts, a signature part of his “big, beautiful bill.” Without them, the question is where the administration will find the money to fund them.
The intent of the measure appears similar in spirit to some proposals advocated in November by Miran while he was still working at hedge fund Hudson Bay Capital. Miran, now chairman of the White House Council of Economic Advisers, called for imposing “user fees” on foreign investors in U.S. Treasuries as part of an aim to weaken the dollar and improve U.S. manufacturers’ competitiveness to address global trade imbalances.
“The clause is clearly endorsed by the administration and designed to give Trump a negotiation tool for pressuring countries to drop digital services taxes and global minimum corporate income taxes, which he sees as unfairly targeting U.S. multinational companies,” wrote economist Will Denyer and Tan Kai Xian at Gavekal Research. “The problem is that before Trump has a chance to use the new tool, its very existence may unsettle bond markets.”
For now, the market reaction to Section 899 appears muted, at best. Still, U.S. assets as a whole have been underperformers this year as Trump’s policies put a dent in the narrative of “American exceptionalism.”
The S&P 500 is up about 0.4% this year, compared with a 20% gain in the German benchmark and an 18% rally in Hong Kong. The Bloomberg Dollar Index slumped about 7%. U.S. Treasuries returned 2%, trailing the 5% gain in the global government bonds in dollar terms, according to data compiled by Bloomberg.
Under the surface
Section 899 is likely to remain in the final version of the reconciliation package, which is now being reviewed in the Senate, because it has broad Republican support, according to Signum Global Advisors.
While some are skeptical if the Section 899 would survive on the concern it would dampen foreign investment into the U.S., Signum Global Advisors predicts it will likely remain in the final version of the reconciliation package, in part because it has Republican support.
“We believe the president’s viewpoint is that there is such immense foreign appetite to invest in the U.S. that it is not at risk of being thrown off course,” according to Charles Myers, a former Wall Street executive who runs advisory firm Signum, and Lew Lukens, a partner at the firm.
To Pepperstone’s Brown, the reason markets haven’t reacted yet is that investors hadn’t fully grasped the significance of the clause. But they’re starting to now.
“It’s only as the dust has settled that people are thinking that maybe there are some things lurking under the surface of the bill we should pay a little bit more attention to,” Brown said. “And I think this Section 899, this is probably one of them.”
