US Budget Bill Provision Sparks Market Concerns with Potential Tax Hike on Foreign Investments

A provision in President Trump's budget bill could impact foreign investments in the US, potentially leading to a market downturn and a decrease in corporate investment. The provision allows the US to raise taxes on companies and investors from countries deemed to have punitive tax policies, affecting investors, US companies with foreign owners, and international firms with American branches. This could lead to a retreat from US assets and add pressure to the dollar.

Wall Street is expressing concern over a provision in former President Donald Trump's budget bill that could significantly impact foreign investments in the United States. Section 899 of the budget bill, which passed the House of Representatives, allows the U.S. government to impose higher taxes on companies and investors from nations deemed to have "punitive tax policies" [1]. This includes U.S. firms with overseas owners, international corporations operating American branches, and individual foreign investors.

The provision aims to counter what the U.S. regards as unfair tariffs abroad but has raised alarms among financial analysts and industry experts due to its potential market implications. Greg Peters, co-chief investment officer at PGIM Fixed Income, described the change as "a market-spooking event, hitting already fragile confidence, particularly from foreign investors" [1]. A senior executive at a major Wall Street bank echoed this sentiment, stating that the provision is "one of the more worrisome ideas to have come out of DC this year" [1].

Analysts at Morgan Stanley noted that Section 899 could put downward pressure on the dollar and "disincentivise foreign investment" [1]. JPMorgan pointed out that the provision carries "significant implications for both US and foreign corporations" [1]. Countries potentially affected by Section 899 include Australia, Canada, the UK, and EU countries [1].

According to law firm Davis Polk, most European Union countries, the United Kingdom, Australia, Canada, and others would fall under the scope of Section 899. For these foreign investors, the new rule would raise taxes on dividends and interest from U.S. stocks and certain corporate bonds by five percentage points each year over a four-year span. Sovereign wealth funds, which currently enjoy an exemption on their American portfolio holdings, would also lose that benefit [1].

Jonathan Samford, president of the Global Business Alliance, warned that the impact would extend far beyond boardrooms, affecting American workers in regions with significant foreign investment [1]. Tim Adams, chief executive of the Institute of International Finance, called the move "counter-productive" [1].

The provision's impact on U.S. Treasury debt is uncertain. Currently, interest on Treasury securities is usually tax-exempt for foreign holders. Imposing taxes on these payouts would mark a dramatic shift in policy. Lewis Alexander, chief economic strategist at hedge fund Rokos Capital Management, noted that taxing Treasuries could be counter-productive as any potential revenues would likely be outweighed by a resulting increase in borrowing costs [1].

Even if Treasuries escape direct taxation, the provision adds another layer of concern for international holders of U.S. debt. Many of these investors are already uneasy about America's growing deficit and shifting trade tariffs. According to The Financial Times, a managing director at a large U.S. bond fund reported receiving anxious calls from foreign clients, who are currently assuming that Treasury holdings will be taxed [1].

With foreign investment already retreating—partly a reaction to earlier tariff measures—Section 899 could further erode overseas demand for American assets. This could lead to a market downturn and a decrease in corporate investment, potentially exacerbating the current fragile economic climate.

References:
[1] Shummas Humayun. (2025, May 29). Wall Street on edge as Trump's hidden tax clause threatens the market. CryptoPolitan. Retrieved from https://cryptorank.io/news/feed/5075c-wall-street-on-edge-as-trumps-hidden-tax-clause-threatens-the-market