AMERICA HAS FOUND A NEW LEVER TO SQUEEZE FOREIGNERS FOR CASH / THE ECONOMIST

Unfair taxes

America has found a new lever to squeeze foreigners for cash

Donald Trump’s tax bill targets foreigners with alarming levies

Tariffs particularly enthuse Donald Trump because foreigners pay them—at least as he sees it—and merely threatening them is an easy way to mess with other countries. 

Two months on from “Liberation Day”, the president and his allies in Congress are trying the same trick with the tax code.

A little past the 1,000-page mark in HR 1, or the “One, Big, Beautiful Bill Act”, sits a provision labelled Section 899, on “unfair foreign taxes”. 

The proposal, now approved by the House of Representatives and under review by the Senate, would put punitive levies on people, investors and companies from countries with taxes Congress dislikes—like a digital services tax (DST), which mainly affects American tech giants, or an undertaxed profit rule, designed to ensure multinationals pay a global minimum corporation tax. 

On the naughty list would probably be most members of the European Union, plus Britain, Australia, Canada, South Korea and others.

Section 899 would add a 5% tax surcharge in its first year, and another 5% each year after that to a maximum of 20%. 

That higher rate would target dividend, interest and property income flowing abroad. 

For now, the language in the bill leaves open a few possible gaps, but punitive rates would almost certainly hit any lending in America by banks from offending countries, dividends on American stocks for those countries’ investors and profits sent home from American subsidiaries. 

Sovereign wealth funds and public pension funds linked to governments that fall afoul of the Section 899 regime would also lose their existing tax exemptions. 

Altogether, the move amounts to a radical act of tax protectionism, a near-unprecedented plan to use America’s tax code as a cudgel to knock other countries into line.

If enacted, this would render America all-but-uninvestable for many foreigners, and clog up the supply of capital to American firms. 

Perversely, companies that had been successfully cajoled by tariffs into scaling-up their American operations would be punished with a surcharge on any cash they sent back to their headquarters overseas. 

Capital flight could cause bond-market tremors. 

The bill also gives the Treasury discretion to add new “unfair foreign taxes” to the list and ensnare more countries.

Like the yo-yoing “reciprocal” tariffs, Section 899 may be intended more as an immediate threat to knock other governments into line than a new long-term arrangement. 

Britain refused to drop its DST in negotiations over the trade deal announced in early May. 

Many other rich countries have either enacted a DST, or plan to do so. 

Section 899 would give the White House fresh leverage to squeeze out concessions where tariffs failed.

Meanwhile, many foreigners working in America would be hit by another provision in HR 1: a 3.5% tax on any money they sent home. 

That would particularly hurt Central American countries like Guatemala, El Salvador and Honduras. 

The Centre for Global Development, a think-tank, reckons each would lose 0.7-1% of GNI in remittances.

Tariffs were a first step in remaking how America engages with the world. 

The Trump administration is now following a similar playbook on tax. 

Foreigners’ labour, investment and business operations in America are treated not as opportunities to be embraced, but choke-points to be squeezed. 

So far, new tariffs have produced few tangible gains for America. 

This adventure in cross-border tax policy won’t be any better.