Wall Street analysts are cautioning that a tax targeting foreign investors in the U.S. budget bill progressing through Congress could end up weighing on demand for U.S. Treasuries and the dollar.
The U.S. House of Representatives last week approved a sweeping tax and spending bill that includes the possibility of imposing a progressive tax burden of up to 20% on foreign investors' passive income, such as dividends and royalties.
The levy, included in section 899, would be paid by entities or individuals from countries that impose taxes the U.S. considers unfair. If it is also approved by the Senate, it could raise $116 billion in taxes over ten years, according to the Congressional Budget Office.
"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," George Saravelos, head of FX research at Deutsche Bank, said in a note on Thursday, adding the new tax could have an adverse impact on demand for U.S. Treasuries.
If passed by the Senate, the rising tax rate on foreigners' investments would come at a time global investors have started to question so-called "U.S. exceptionalism," or its unique ability to outperform other financial markets, amid growing fiscal deficits and a new trade policy based on tariffs.
Morgan Stanley said in a note that the new tax would weaken the dollar, as it would reduce the foreign appetite for U.S. assets.
Morgan Stanley's strategist Michael Zezas singled out European investors with passive income in the U.S. as particularly vulnerable to the tax. The bank did not provide any estimate for the impact.
According to law firm Davis Polk, nations that could be considered “discriminatory foreign countries” include many that are part of the European Union, as well as India, Brazil, Australia and United Kingdom.
The White House did not immediately comment on the impact of the new tax burden.
