Wall Street analysts are raising concerns that a proposed tax on foreign investors, included in the U.S. budget bill, could significantly impact demand for U.S. Treasuries and weaken the dollar. The tax, which was approved by the U.S. House of Representatives, is set to impose a progressive tax rate of up to 20% on foreign investors’ passive income, including dividends and royalties.
Details of the Tax and Its Potential Impact
The tax, detailed in section 899 of the bill, would target entities such as sovereign wealth funds, foreign companies operating in the U.S., and individuals from countries that impose taxes the U.S. deems unfair, including digital service taxes. Analysts, such as George Saravelos from Deutsche Bank, have warned that this legislation could transform a trade war into a capital war, with negative effects on foreign investment and the U.S. economy.
Concerns Over Foreign Investment and Dollar Weakness
If passed by the Senate, the tax is expected to raise approximately $116 billion over ten years. However, some financial analysts are concerned that the tax could deter foreign investment in U.S. assets, particularly at a time when the U.S. is already heavily reliant on foreign capital to finance its growing debt. Elias Haddad from Brown Brothers Harriman stated that the tax could be detrimental to the dollar, a sentiment echoed by other analysts such as Rajeev Thakkar, who mentioned the potential reduction in foreign appetite for U.S. investments.
Foreign Investment in U.S. Treasuries
While the immediate impact of the tax has not yet been seen, some analysts believe that U.S. Treasuries are still offering value, with higher yields and a weaker dollar compensating for other factors. However, others, including Morgan Stanley, have a more bearish outlook, predicting that the new tax could reduce foreign demand for U.S. assets, which could further weaken the dollar. The U.S. dollar has already fallen 8% this year against a basket of major currencies, marking its worst performance since 2017.
Global Reactions and Concerns
Countries such as those in the European Union, India, Brazil, Australia, and the United Kingdom could be considered “discriminatory” under this tax provision, which may increase tensions with key international trading partners. The proposed tax burden has also raised concerns among international companies with U.S. subsidiaries, fearing that higher taxes could make it more difficult to operate in the U.S. economy.
