Aside from the usual trade wranglings, Section 899 of this bill (if voted through) effectively introduces the most wide-ranging adverse changes to the tax treatment on foreign capital in the U.S. since the Deficit Reduction Act of 1984 and the Foreign Investors Tax Act of 1966.
After years of foreign investors piling into US assets, experts fear the consequences of Section 899 may be far-reaching.
The provision amounts to "weaponization of US capital markets into law" that "challenges the open nature of US capital markets by explicitly using taxation on foreign holdings of US assets as leverage to further US 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 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."
Buyers of US government bounds would ostensibly be less incentivized to buy American debt, since they'll get lower returns, at a time when the US Government arguably really needs them to keep doing so.
Taxing foreign holders of US Treasuries will ultimately reduce demand for American financial assets.
********************************************
"Fast forward to this Friday, and some analysts are playing down the whole Section 899 saga. In the case of Treasuries specifically, they point to carve-outs under the existing Portfolio Interest Exemption (PIE), which, under certain circumstances, exempts bonds where the foreign investor owns less than 10% of the voting power of the issuer. That would probably mean trillions of dollars in both US Treasuries and corporate debt held by foreign investors could escape the tax, and may be why the Joint Committee on Tax has estimated that Section 899 will only increase revenue by about $116 billion over a decade.
All of which raises the question of why bother with Section 899 in the first place if you're only going to simultaneously exempt a majority of US bond holdings? As Michael McNair put it yesterday: "Congress wouldn't draft a 'retaliatory surtax' that raises only a few billion unless they expected the portfolio interest base to re-enter the tax net." Section 899 only really makes sense, he argues, if PIE is simultaneously repealed.
So now, investors around the world are once again left to decide for themselves how serious the administration is about all of this, and whether it will reverse course in the event that investors push back. For all the inconsistencies in some of the administration's policies, you could argue that Trump's love of tariffs, his hatred of imports, and his ambivalence towards exports, are proving to be some of his most consistent positions. And for all the back and forth on a potential Mar-a-Lago Accord aimed at depreciating the dollar, Section 899 sounds a lot like Stephen Miran's suggestion in his 2024 paper of imposing "user fees" on Treasuries. (Miran recently downplayed the paper, describing it as "a zombie that I just haven't been able to kill").
And so, you have analysts like Matt King at Satori Insights arguing that investors shouldn't get too bogged down in the details of Section 899. The key, he argues, is to figure out just how serious Trump is when it comes to clamping down on foreign capital, and how much pain or criticism he's willing to stomach in order to do it.
As King writes:
Bloomberg article:
Obscure tax item in Trump's 'Big Bill' stokes Wall Street angst East Bay Times
After years of foreign investors piling into US assets, experts fear the consequences of Section 899 may be far-reaching.
The provision amounts to "weaponization of US capital markets into law" that "challenges the open nature of US capital markets by explicitly using taxation on foreign holdings of US assets as leverage to further US 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 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."
Buyers of US government bounds would ostensibly be less incentivized to buy American debt, since they'll get lower returns, at a time when the US Government arguably really needs them to keep doing so.
Taxing foreign holders of US Treasuries will ultimately reduce demand for American financial assets.
********************************************
"Fast forward to this Friday, and some analysts are playing down the whole Section 899 saga. In the case of Treasuries specifically, they point to carve-outs under the existing Portfolio Interest Exemption (PIE), which, under certain circumstances, exempts bonds where the foreign investor owns less than 10% of the voting power of the issuer. That would probably mean trillions of dollars in both US Treasuries and corporate debt held by foreign investors could escape the tax, and may be why the Joint Committee on Tax has estimated that Section 899 will only increase revenue by about $116 billion over a decade.
All of which raises the question of why bother with Section 899 in the first place if you're only going to simultaneously exempt a majority of US bond holdings? As Michael McNair put it yesterday: "Congress wouldn't draft a 'retaliatory surtax' that raises only a few billion unless they expected the portfolio interest base to re-enter the tax net." Section 899 only really makes sense, he argues, if PIE is simultaneously repealed.
So now, investors around the world are once again left to decide for themselves how serious the administration is about all of this, and whether it will reverse course in the event that investors push back. For all the inconsistencies in some of the administration's policies, you could argue that Trump's love of tariffs, his hatred of imports, and his ambivalence towards exports, are proving to be some of his most consistent positions. And for all the back and forth on a potential Mar-a-Lago Accord aimed at depreciating the dollar, Section 899 sounds a lot like Stephen Miran's suggestion in his 2024 paper of imposing "user fees" on Treasuries. (Miran recently downplayed the paper, describing it as "a zombie that I just haven't been able to kill").
And so, you have analysts like Matt King at Satori Insights arguing that investors shouldn't get too bogged down in the details of Section 899. The key, he argues, is to figure out just how serious Trump is when it comes to clamping down on foreign capital, and how much pain or criticism he's willing to stomach in order to do it.
As King writes:
Quote:
"Ultimately the administration faces the same trade-off as with tariffs: the more limited the application, the lower the revenue generated, and the larger is the hole in the deficit needed to be plugged with domestic taxation or spending cuts. While the obstacles and exemptions may yet mean the impact, both of Section 899 and of tariffs, proves extremely limited, our bet would be the opposite … If the discount on the dollar were larger, or if international investors were more obviously short, the investment conclusion might be less straightforward. But as it is, with US equities still trading at a premium and US Treasuries still at risk of widening vs govies elsewhere, Section 899 seems to us to give investors yet another reason to sell America."
Bloomberg article:
Obscure tax item in Trump's 'Big Bill' stokes Wall Street angst East Bay Times
