Buried deep in the more than 1,000-page tax-and-spending bill that President Donald Trump is muscling through Congress is an obscure tax measure that’s setting off alarms on Wall Street and beyond.
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 quickly 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 erratic 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 quickly put 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 tariff-heavy trade agenda, which is now snarled in court, but the thrust is the same, and its aims align with some of the positions set forth by the economist Stephen Miran in a paper last November and those seeking a so-called Mar-a-Lago global restructuring accord. All seek to address perceived unfair treatment of the U.S. by the rest of the world using targeted tools designed to put the country on a more even footing. But after years of foreign investors piling into U.S. assets, experts fear the consequences of Section 899 may be far-reaching.
The provision amounts to “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 Inc. The clause also targets countries using provisions in a multi-country 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, 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 NV. “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.
On Thursday, a federal appeals court offered Trump a temporary reprieve from the ruling, and White House officials said they planned to continue defending the legality of their efforts on trade to the U.S. Supreme Court.
The intent of the measure appears similar in spirit to some ideas put forth 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, raised the possibility of imposing “user fees” on foreign investors in Treasuries as one option to help push down the dollar and 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.”
“With tariff revenue more uncertain and less likely to offset tax cuts in the GOP budget bill, traders need to be prepared for tax changes on foreign holders, ultimately reducing demand for American financial assets,” said Michael Ball, a Markets Live macro strategist.
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 “America exceptionalism.”
The S&P 500 is up about 0.4% this year, compared with a 20% gain in the German benchmark and a 18% rally in Hong Kong. The Bloomberg Dollar Index slumped about 7%. The US Treasuries returned 2%, trailing the 5% gain in the global government bonds in dollar terms, according to data compiled by Bloomberg.
Under the surface
While some are skeptical if the Section 899 would survive on 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 broad 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 because 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,” said Brown. “And I think this section 899, this is probably one of them.”
