A new and potentially more damaging front is opening in America's economic policy, one that could significantly impact global capital flows and investor sentiment. Buried within the Republican budget bill currently in Congress are provisions that threaten to impose new taxes on foreign investors, a move some analysts warn could do more harm than President Donald Trump's well-publicised tariffs.
The Mechanics of the New Tax Threat
The core of the concern lies in an obscure clause known as "Section 899". This provision, if passed, would grant the US Treasury Secretary sweeping new powers. The authority would be to tax interest, dividends, and rental income flowing to foreign investors from countries deemed to have "unfair" tax systems. The initial tax rate is set at 5%, but it carries the potential to escalate dramatically, reaching as high as 20%.
This is not an isolated measure. A separate clause within the same budget bill proposes a 3.5% tax on any money sent out of the United States by non-citizens. For multinational companies operating in America and their expatriate staff, this creates a significant new cost for repatriating profits or sending earnings home. The combined effect paints a picture of rising capital protectionism.
Why America Cannot Afford to Scare Foreign Capital
The timing and nature of these proposals are particularly risky for the United States. Unlike trade, where the US economy is relatively insulated (trade as a share of GDP is less than half the rich-world average), America is unusually reliant on foreign investment.
The numbers are staggering. Foreign entities own a colossal $62 trillion in American assets, including derivatives. In contrast, Americans own only about $36 trillion in assets abroad. This leaves the US with a net international investment position of -90% of GDP, the lowest among any major developed economy. Crucially, foreigners hold about one-third of US government debt, amounting to approximately $9 trillion.
This reliance comes at a precarious moment. The same Republican budget bill, by making past unfunded tax cuts permanent, is expected to lock in annual government borrowing at 6-7% of GDP. While US Treasury bonds might be exempted from Section 899, the uncertainty alone could spook foreign buyers. After the market volatility following Trump's "Liberation Day" tariff announcement, making foreign investors skittish now is seen by many as a reckless gamble.
Global Ripple Effects and a Dangerous Precedent
The damage would extend far beyond US borders, distorting the global allocation of capital. While countries could adapt to restricted access to American goods (US imports account for about 15% of global final demand for imports), being shut out of Wall Street is a different proposition altogether. American stocks constitute about 60% of global equity value, and the US dollar remains the world's primary reserve currency.
Foreign investors, from European pension funds to Asian sovereign wealth funds, would lose vital benefits of diversification. The proposed taxes would make the world economy less efficient and ultimately poorer. Furthermore, they directly contradict President Trump's stated goal of encouraging foreign companies to "build factories in America," as the cost of operating and remitting money would rise sharply.
Proponents argue that Section 899 is merely a negotiating tool aimed at countries that have targeted US tech giants with digital services taxes. They also point out that the remittance tax is relatively small. However, critics counter that taxes tend to expand over time, and there is little political will in Congress to defend foreign interests, as evidenced by the legislature's failure to block tariffs.
The budget bill signals a potential shift from hostility towards foreign goods to hostility towards foreign capital. If this new era arrives, the ensuing economic damage will be so extensive that the question of who started the fight will become irrelevant.
