The taxation and breakdown of global capital flows
(Written on a plane - unchecked, illiterate but important)
Well the first steps are starting to happen: A provision in the House-passed fiscal package (H.R. 1), creates. a new Section 899 of the tax code, which would raise the US tax on many forms of passive income and active business income by 5pp next year, 20pp over four years and, in some cases, as much as 50pp over the next decade.
The policy would only apply to entities based in or owned by countries that impose “discriminatory” taxes on US entities, but these countries are responsible for the majority of foreign investment in the US. These policies could negatively impact holders of US assets.
The provisional list of countries to be targeted account for 60% or so of foreign investment in the US (FDI and Portfolio).
It is not clear if foreign central banks’ holdings of US assets are targeted .
If this becomes law it is hard to imagine a more effective way of hitting the US$ as a reserve currency or diminishing foreign appetite for US assets - 9ncluding US Treauries.
The US runs a large external deficit and has big negative International Investment Position. It needs to hoover up capital from the rest of the world daily!
Discrimination against foreign imvestors and impeding the free flow of capital - including capital controls - is, however, consistent with what to expect as nationalistic economic architecrure replaces globalisation and the liberal world order fragments. Trade cannot become “national” without capital flows following suit. They are flip sides of the same coin!
More when i am off the plane.