Obscure tax item in Trump’s ‘big, beautiful Bill’ alarms Wall Street

NEW YORK – 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 is 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 US 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 is 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 US assets has already been shaken by Mr 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 Mr Michael Brown, a strategist at Pepperstone Group. Mr Brown said he received so many inquiries from concerned clients that he quickly put together a report breaking down the measure. “If you’re now talking about massively unfavourable 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 US assets. 

The measure would boost the federal income tax rate on passive US income earned by investors and institutions based in the targeted countries, first by 5 percentage points, then rising by another five points each year to a maximum of 20 points above the statutory rate.

The proposed tax is separate from Mr 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 November 2024 paper and those seeking a so-called Mar-a-Lago global restructuring accord. All seek to address perceived unfair treatment of the United States 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 US assets, experts fear the consequences of Section 899 may be far-reaching.

The provision amounts to “weaponisation of US capital markets into law” that “challenges the open nature of US capital markets by explicitly using taxation on foreign holdings of US assets as leverage to further US economic goals”, Mr George Saravelos, head of FX research at Deutsche Bank, wrote in a report on May 29.

“We see this legislation as creating the scope for the US 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, Britain, France and Australia that impose “digital services taxes” on large technology companies such as Meta Platforms. The clause also targets countries using provisions in a multi-country deal for minimum corporate taxes. 

“The clause is clearly endorsed by the administration and designed to give Mr Trump a negotiation tool for pressuring countries to drop digital services taxes and global minimum corporate income taxes, which he sees as unfairly targeting US multinational companies,” wrote economists 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.”

‘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 US dollar.

“It’s indeed sounds troubling,” said Mr Rogier Quaedvlieg, senior US economist at ABN Amro Bank. “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 US court order on May 28 that blocked many of Mr Trump’s tariffs on imports. Tariffs are considered a key source of revenue to fund Mr 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 May 29, a federal appeals court offered Mr 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 US Supreme Court.

“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 Markets Live macro strategist Michael Ball.

For now, the market reaction to Section 899 appears muted, at best. Still, US assets as a whole have been underperformers in 2025 as Mr Trump’s policies put a dent in the narrative of “American exceptionalism”. 

While some are sceptical if Section 899 would survive on concern it would dampen foreign investment into the US, 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 US that it is not at risk of being thrown off course,” said Mr Charles Myers, who runs advisory firm Signum, and Mr Lew Lukens, a partner at the firm.

To Pepperstone’s Mr Brown, the reason markets have not reacted yet is because investors had not fully grasped the significance of the clause. But they are 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 Mr Brown. “And I think this Section 899, this is probably one of them.” BLOOMBERG