Capital pains
America’s tax on foreign investors could do more damage than tariffs
Provisions in the Republican budget are a dangerous step
America needs foreign investors, and foreign investors need America.
Yet clauses buried in the Republican budget bill in Congress are a threat to this crucial symbiosis.
Under the obscure “Section 899”, the treasury secretary will gain the power to tax interest, dividends and rent flowing to foreigners in countries with tax systems that the law defines as “unfair”.
The rate will start at 5% but could rise as high as 20%.
That could mean lower returns for pension funds, governments and individual investors from the rest of the rich world.
Companies with operations in America would also be caught in the net when they remit their profits.
A separate clause taxes at 3.5% money sent out of the country by any non-citizen.
It is a worrying new front in the trade war.
President Donald Trump’s tariffs have been highly disruptive, but at least America’s economy does not depend heavily on trade, which as a share of GDP is less than half the rich-world average.
The same cannot be said for foreign investment, on which America is unusually reliant.
Foreigners own $62trn-worth of American assets (including derivatives) compared with only $36trn owned abroad by Americans.
The balance, at -90% of GDP, is by far the lowest “net international investment position” of any big, rich economy.
One third of America’s government debt, amounting to $9trn, is held by foreigners.
This is a particularly bad time for America to become less attractive to foreign investors.
The budget bill, by making past unfunded tax cuts permanent, will also make annual government borrowing worth 6-7% of GDP the norm.
Treasuries will probably be exempted from Section 899, but that is not yet certain.
Even if they are carved out, foreign buyers might reasonably wonder if the rules could change in the future.
Scaring them when there is such a big deficit to finance is reckless, especially when foreign investors have already become skittish about American assets after Mr Trump’s “Liberation Day” tariff announcement.
Moreover, the bill works against the president’s desire to have foreign companies build factories in America.
Why would they, if they and their foreign staff must pay a steep price to send money home?
Capital protectionism will also badly hurt the rest of the world.
Other countries could, ultimately, create their own trading arrangements and make do with restricted access to America’s goods market, which accounts for only 15% of final demand for imports.
Being denied entry to Wall Street is another matter.
American stocks account for about 60% of global equities by value, and the dollar is the world’s reserve asset.
Even if American investments no longer produce outsize returns, foreigners would lose the benefits of diversification.
The allocation of capital across the globe would be distorted, making the world economy less efficient, and therefore poorer, over time.
Optimists contend that Section 899 is a negotiating tool and that the tax on remittances is small.
And didn’t other rich-world countries start the tax war by ganging up on America’s technology giants with “digital services taxes” and other rules designed to extend the reach of their tax systems across borders?
The proposed law specifically targets these rules; it does not give Mr Trump a free hand.
The trouble with these arguments is that new taxes tend to expand over time regardless of their initial scope and size.
There is no constituency in Congress to defend the interests of foreigners, and the legislature’s failure to avert tariffs shows how unwilling it is to challenge the president’s self-harming protectionism.
The budget bill is a sign that the world could be entering an era of hostility towards foreign capital, not just foreign goods.
If that day arrives, the damage will be so great that who started the fight will be irrelevant.
0 comments:
Publicar un comentario