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Investing.com -- Wall Street analysts highlighted potential risks associated with a new U.S. tax targeting foreign investors, which is part of a budget bill currently under consideration in Congress. The bill, known as the "Big Beautiful Bill," contains a provision that could diminish demand for U.S. Treasuries and the dollar.

George Saravelos from Deutsche Bank (ETR:DBKGn) expressed concerns about Section 899 of the bill, which he believes could represent the most significant negative alteration to the tax treatment of foreign capital in the U.S. since the Deficit Reduction Act of 1984 and the Foreign Investors Tax Act of 1966. According to Saravelos, the legislation could transform a trade war into a capital war, a point underscored by the recent court ruling that potentially limits President Trump’s trade policy.

The proposed Section 899 could challenge the openness of U.S. capital markets by using taxation as a tool to advance U.S. economic goals, drawing parallels to recent trade tensions. The legislation sets a low threshold for imposing retaliatory taxes on developed market countries, which could be activated simply by the Treasury Secretary listing countries deemed to be engaging in discriminatory practices.

Saravelos also pointed out that the bill could exacerbate issues related to the U.S. twin deficit by allowing a 20% tax on U.S.-sourced foreign income under certain conditions. This could effectively reduce the yield on U.S. Treasuries by nearly 100 basis points, adversely affecting their demand and the financing of the U.S. deficit.

Despite potential carve-outs in the legislation, Deutsche Bank argues that the added uncertainty and complexity could deter dollar inflows, especially at a time when the attractiveness of such investments is already being questioned. The bank noted that the possibility of the legislation’s passage is stirring discussions among large investors and could lead to a structural reevaluation of dollar asset allocations.

"Should the new Section 899 authority be voted in to law, it will do little to ease concerns that these asset allocations are under structural reconsideration," Saravelos concludes.

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