What exactly is Section 899 of the ’Big Beautiful Bill’?

Investing.com -- In a recent note to clients, Capital Economics analysts assessed Section 899 of the U.S. "One Big Beautiful Bill Act," currently moving through Congress. 

This section, "buried deep inside its pages," outlines how the U.S. government "could impose taxes on individuals, businesses and other entities from countries deemed to have a tax regime that discriminates against U.S. interests." 

This could potentially impact countries like the U.K., France, Germany, Canada, Australia, and India, particularly those levying a digital services tax.

The analysts note that such provisions are not entirely without precedent, citing "Section 891 of the tax code has lain on the books since the Great Depression," authorizing the doubling of taxes on entities from countries with discriminatory tax policies toward the U.S. 

However, in the current "febrile environment for dollar assets," the attention on Section 899 has "only fuelled market anxiety," with some commentators labeling it a "ticking time bomb" or "revenge tax."

Capital Economics notes that some critics have gone further, suggesting the proposal signals "the early stages of the U.S. imposition of capital controls." 

Capital Economics, however, refutes this, clarifying that "Capital controls are designed to restrict the flow of capital in and out of a country." 

In contrast, Section 899 "is aimed at the tax policies of countries that are perceived to act against U.S. interests" and is "not intended to reduce capital flows in or out of the U.S." 

They suspect the market implications of Section 899 "may ultimately be more limited than many now seem to fear."

Despite this, Capital Economics acknowledges that it’s "no longer impossible to imagine that the U.S. might consider imposing some form of control on capital flows in an effort to rein in its large trade and current account deficits." 

However, they state that such controls would not be cost-free, risking havoc in financial markets and potentially pushing up U.S. borrowing costs and unemployment. 

The fundamental problem, according to Capital Economics, remains "US over-consumption" and a lack of prospect for timely fiscal adjustments from either the U.S. or surplus countries.