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Wall Street, fund managers, and multinational companies are pushing back against Section 899, a proposed tax provision that would impose up to a 20% levy on foreign investors from countries with levies the U.S. considers discriminatory. While the White House frames it as a counter to unfair digital service taxes and global minimum rules, many investors view it as a threat to U.S. capital markets.

Unanswered Questions Despite $40 Trillion at Stake

The U.S. currently hosts nearly $40 trillion in foreign-held assets, including stocks, Treasuries, and credit instruments. Fund managers, including the Investment Company Institute, warn that the tax structure under Section 899 would apply to dividend income, real estate gains, REIT distributions, and certain loans made by foreign banks. With portfolio interest reportedly exempt, there is still no formal ruling clarifying whether this exclusion covers all fixed-income securities.

This uncertainty is already chilling deal flow. Gabriel Grossman, tax partner at Linklaters, said clients are pausing U.S. investment plans. European investors focused on dividend-paying stocks are reconsidering holdings. Some multinational firms are even evaluating whether to exit U.S. operations entirely.

Multinationals Warn of Job Losses and Higher Costs

The Global Business Alliance, representing international companies with U.S. operations, estimates that up to 8.4 million jobs could be at risk if companies pull back. These firms fear being taxed on intercompany loans, dividends, and cross-border financing. Jonathan Samford, the group’s president, called the policy “punitive” and warned that firms may simply relocate to lower-tax jurisdictions.

The CRE Finance Council flagged risks to real estate markets. If foreign capital dries up, the cost of financing could rise, leading to reduced property values. David McCarthy of the Council explained that securitized products and equity capital for real estate could see a steep decline.

Even asset managers stand to lose. Many U.S. mutual funds and ETFs rely on steady foreign participation. The Investment Company Institute warned that if foreign investors exit, it could lead to broad outflows and shrinking fund assets, cutting into the industry’s revenues.

Trump’s Revenge Tax: Designed to Intimidate, Not Raise Revenue?

Despite its revenue target of $116 billion over 10 years, the Joint Committee on Taxation projects that Section 899, also known as the Revenge Tax, will ultimately shrink the tax base by driving away foreign capital. By the early 2030s, the tax may become revenue-negative.

Analysts view the proposal as more geopolitical than economic. Alan Cole from the Tax Foundation described the approach as “tossing a grenade inside our own house.” Pascal Saint-Amans, former OECD tax director, said the law’s vague language and broad coverage make it dangerously destabilizing.

Industry leaders believe the bill is intended to pressure foreign governments into rolling back taxes aimed at U.S. firms, particularly tech companies. But the potential collateral damage of Section 899 to American markets, companies, and workers is now drawing more attention.

Senate Republicans Signal Need for Clarity

Facing industry blowback, Senate Finance Committee members have begun reassessing the provision. Senator Steve Daines noted that Section 899’s current structure might compromise the U.S.’s status as the global gold standard for investment.

Morgan Stanley said in a note that it expects Senate Republicans to “clarify the policy to mitigate this risk,” likely by narrowing its scope or adding exemptions. Whether that happens before foreign investors start reducing exposure remains to be seen.

If Section 899 passes unamended, investors and multinational employers warn that U.S. equity markets could face a sustained outflow of capital, weakening valuations, and putting pressure on the U.S. dollar. The global message, critics say, would be that U.S. capital markets are no longer immune to retaliatory policymaking.

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