Deutsche Bank says tax could erode the allure of US assets

The so-called “revenge tax,” Section 899 in President Donald Trump’s fiscal package, has raised concerns among Wall Street investors and firms. Deutsche Bank even warned that tax could quickly erode the allure of US assets.

The legislation item dictates an increase in tax rates for foreign individuals and companies that the government considers “discriminatory.” What worries investors more is that the policy extends to tax hikes on passive income, like interest and dividends.

Wall Street analysts have warned that the provision could discourage foreign investors, especially since their confidence in the US market waned when Trump introduced tariffs earlier this year. 

Saravelos believes revenge tax depresses investor yield 

George Saravelos, head of FX research at Deutsche Bank, believes the “revenge tax” could reduce their appeal to investors, warning that it could even cultivate a capital war. 

He wrote:

“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.”

George Saravelos

The United States Court of International Trade ruled against Trump’s tariffs, stating that the President is not authorized to set unlimited tariffs on nearly every country worldwide. However, Section 899 could serve as a workaround to impose new taxes.

Saravelos argued that the legislation item uses taxation on foreign investors to push the US government’s economic goals and can be implemented with little justification. He added that the provision would only complicate deficit financing, slashing the effective yield foreign governments earn on Treasury securities by close to 100 basis points.

He suggested that while his yield cut estimation may be off and may be less severe, any added uncertainty and complexity surrounding US investments further weaken the appeal of dollar inflows—especially at a time when confidence is already wavering. He also believes it would not be completely unreasonable for investors to deduce that Trump wants to tax foreign capital to have leverage.

The JCT estimates revenue loss in 2033 and 2034 due to the revenge tax

The Joint Committee on Taxation (JCT)  also agrees with most Wall Street investors that policy could drive away foreign investors. The committee’s chief of staff, Thomas Barthold, even claimed Section 899 would only plunge international demand for American direct and portfolio investment and cultivate avoidance and compliance behavior.

The JCT projected that the provision could pull in close to $117 billion over the next decade. However, it would eventually reduce yearly US tax revenues by $13 billion in 2033 and 2034. Barthold explained that foreign companies’ lowered earnings would decrease baseline US tax receipts. 

He added that diminished foreign demand would also depress US asset values, hence the expected revenue loss.

On Friday, House Ways and Means Committee Chair Jason Smith, a proponent of the revenge tax, even asserted that he hopes it will not be enforced and only stand to dissuade foreign governments from implementing unfair policies against US companies. 

Elias Haddad, a Brown Brothers Harriman & Co. strategist, also noted that the legislation would now only undermine foreign investment at a time when the country is still heavily dependent on foreign inflows to clear its debts.

Some investors ran toward Europe and China when Trump first launched his erratic tariff plan, and so far, analysts see signs of a buyer’s strike, where investors forgo US markets.

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