Who would pay America's 'revenge tax' on foreigners?

Mint

3 days ago

The trouble started, as it often does, with France. Congressmen in the 1930s complained about 'nations throughout this world who are not particularly friendly to Uncle Sam in a business way". Mainly that meant the European power, which had slow-walked ratification of a tax treaty and was double-taxing Americans in the meantime. In 1934, to persuade French policymakers to pick up the pace, Congress passed a provision that is now known as Section 891. It granted the president the power to double levies on citizens and companies from countries that he judged to be overtaxing Americans.
Ultimately, France ratified the treaty and Section 891 was never used. But it has stayed on the books ever since. Nearly a century later, during another period in which globalisation is threatened, President Donald Trump and his congressional allies have revived the idea of a revenge tax. As a consequence, foreign investors, who collectively own more than $60trn in American assets, are growing worried about a fresh round of chaos—just months after the 'Liberation Day" tariff saga.
The source of this stress is Section 899, a proposed addition to the tax code in Mr Trump's 'One Big Beautiful Bill Act", which has passed the House of Representatives and is now being considered by the Senate. This targets countries with 'unfair foreign taxes", principally digital-service taxes, which mainly affect American tech giants, and undertaxed-profit rules, aimed at ensuring companies do not squirrel profits away in tax havens.
As in the 1930s, these taxes have been pushed most enthusiastically by Europeans. But most rich jurisdictions, including Australia, Britain, Canada, the eu, Japan and South Korea, have at least one offending levy. The Tax Foundation, a think-tank, estimates that 80% of America's foreign direct investment comes from countries covered by Section 899. For once, China is a rare exception.
Section 899 penalises the investment and business income that is earned by foreigners in America. Dividends paid to foreign shareholders, profits from American outposts of foreign firms and proceeds earned by foreigners selling property would all suffer as a result of the provision. Most interest payments, including on Treasuries, would probably be safe, with the peculiar exception of interest on lending in America by foreign banks. That adds up to over half a trillion dollars in annual flows.
The provision would add five percentage points of tax each year, up to a cap of 20, to the bills of those from offending countries. It would also widen the scope of the Base Erosion and Anti-Abuse Tax, America's own effort to deter foreign firms from moving profits abroad. Investors connected to foreign governments on the wrong side of Section 899, such as pension and sovereign-wealth funds, would lose other protections they now enjoy.
According to the Joint Committee on Taxation, a watchdog, Section 899 is a rare tax rise that is on the wrong side of the Laffer Curve (meaning that it would shrink revenues rather than raising them). By the early 2030s, the JCT forecasts, the provision would start to lose the government money by scaring off foreign investors and thus lowering American asset prices.
In reality, section 899's purpose is to intimidate not to raise revenue. Alan Cole of the Tax Foundation uses a military metaphor: 'We are tossing a grenade at your stuff while it's inside our house. But we are also tossing a grenade inside our own house." The White House must hope the mere threat of Section 899 taxes persuades countries to wind back their own levies.
Such an approach, alongside a proposed tax of 3.5% on remittances that has also passed the House, hints at a troubling pattern. As Tan Kai Xian of Gavekal, a consultancy, notes: 'The revenge tax [could be] perceived as some sort of inbound capital control…the remittance tax could easily be perceived as a mini version of an outbound capital restriction." The combination marks a clear, if ginger, step towards soft capital controls, transposing Mr Trump's protectionist logic from goods trade to capital flows.
A century or so ago, it was France that blinked first. Today Mr Trump's volatile behaviour has already made investing in America a riskier bet. And his enormous deficits still require foreigners to finance them. If Section 899 roils the market enough, this time the outcome may not be in America's favour. Mon dieu.