America’s tax on foreign investors could do more damage than tariffs

Subscribe to enjoy similar stories. America needs foreign investors, and foreign investors need America. Yet clauses buried in the Republican budget bill in Congress are a threat to this crucial symbiosis.

Under the obscure “Section 899", the treasury secretary will gain the power to tax interest, dividends and rent flowing to foreigners in countries with tax systems that the law defines as “unfair". The rate will start at 5% but could rise as high as 20%. That could mean lower returns for pension funds, governments and individual investors from the rest of the rich world.

Companies with operations in America would also be caught in the net when they remit their profits. A separate clause taxes at 3.5% money sent out of the country by any non-citizen. It is a worrying new front in the trade war.

President Donald Trump’s tariffs have been highly disruptive, but at least America’s economy does not depend heavily on trade, which as a share of GDP is less than half the rich-world average. The same cannot be said for foreign investment, on which America is unusually reliant. Foreigners own $62trn-worth of American assets (including derivatives) compared with only $36trn owned abroad by Americans.

The balance, at -90% of GDP, is by far the lowest “net international investment position" of any big, rich economy. One third of America’s government debt, amounting to $9trn, is held by foreigners. This is a particularly bad time for America to become less attractive to foreign investors.

The budget bill, by making past unfunded tax cuts permanent, will also make annual government borrowing worth 6-7% of GDP the norm. Treasuries will probably be exempted from Section 899, but that is not yet certain. Even if they are carved out,