Will Trump Tighten The Screws On Capital?

Donald Trump wants to right-size trade with other countries. He is hell bent on removing the trade deficit.

To Trump, a trade deficit is a sign of economic weakness. Americans are “losing” to other countries.

The losses are two-fold. American workers are losing good-paying manufacturing jobs. And money outflows are draining the national wealth.

So far, his ire has focused on manufacturing jobs and the trade deficit. Yet, he could have another card up his sleeve that no one is talking about – yet.

I worry that Trump may shift his focus to the other side of the US balance sheet: what is called the Capital and Financial Account Balance (Capital Account for short).

Every country has a balance of payments. This is basically a fancy way of saying that money and goods into a country have to equal money and goods out.

On the one side of the balance of payments are trade flows. On the other side are investing flows.

Source: Reserve Bank of Australia

The nature of a nations balance of payments is that the two sides of the ledger must balance to zero. Money and goods going coming in has to equal money and goods going out.

The trade deficit is large – a little under $1 trillion last year. The biggest deficit country is China, which is about $300B, and Mexico at $175B.

To counter those deficits, capital needs to be coming in from other countries. Japan, China and Canada are the biggest sources of foreign portfolio investment, which is investments in US Treasuries, corporate bonds and stocks.

With Trump, you gotta think outside-the-box because his policy ideas are often way, WAY outside the mainstream.

One VERY big outside the mainstream idea, would be for Trump to go after the Capital Account.

What would that mean? It would mean taxes on foreign investors where you’ve never had them before.

WILL YOU HAVE TO PAY TO BUY STOCKS?

The capital account of a nation describes the inflows and outflows of investment.

Money can flow in and out of a country in two ways

1. In return for buying or selling goods produced by the country
2. Investing in an asset that resides in the country

How can Trump target #2? Tax the investing inflows.

What we are talking about here is a transaction tax, one that applies to each purchase of a USD asset. It could be applied to Treasuries, to bonds, or even to stocks.

That would mean every time you bought shares of a US company, you’d have to pay to do so.

This isn’t a new idea. Michael Pettis wrote about it in a 2019 article titled, “Washington Should Tax Capital Inflows“.

Pettis is a China-expert, and his reference point is the Chinese trade surplus with the US. But there is no reason that such a tax couldn’t be applied to other countries, or across the board.

Taxing dollars coming into the United States makes sense for a couple of reasons.

First, taxing it anywhere else is really hard.

Most countries tax capital gains, applying the tax to whatever profit you make on the investment.

But these taxes are on residents, where the government has all the data they need to calculate the tax. It is much trickier (maybe impossible) when the holders don’t reside in the United States. The IRS doesn’t have access to the information required to apply the tax at the time of sale.

Second, it would be counter-productive to apply a tax at sale because it is an outflow of capital, because more outflows encourage a weaker dollar, which is another thing that will help trade (more on this shortly).

Third, the tax would encourage long-term investments and discourage short term ones. Buying 3-month T-Bills would be especially painful (you’d be taxed 4 times each year). Buying the 10-year Treasury would be a minor annoyance.

Finally, taxing capital is flexible. If the US needs foreign capital, just eliminate the tax to encourage it.

What would it cost us investors?

In his article, Pettis suggests that 50 basis points (0.5%) would be sufficient.

That isn’t a huge amount. Think $500 on $100K of Meta stock.

Yet, it’s enough to discourage excessive trading in US stocks though. Trading in and out of Meta once a month would cost you $6K over a year!

Which I guess is the point. The tax targets day traders and speculators, the type of capital the US would like less of.

HERE’S HOPING SANITY PREVAILS

Look, I can handle 50 basis points if it comes to it. I just don’t want it to get too crazy.

Crazy is if the US went down the road of a broad withholding tax.

Already the US has a 30% withholding tax on interest and dividends received from US sources. While tax treaties reduce this amount (in Canada to as much as 15%), it would be easy for Trump to opt out.

That would hurt, but worse would be a withholding tax on capital gains.

Fortunately, as I’ve already pointed out, this seems unlikely because the information just isn’t there for the IRS.

And to be clear, I haven’t seen this suggested anywhere (and believe me, I looked!).

Nevertheless, it is worth pointing out that under the Foreign Investment in Real Property Tax Act (FIRPTA), capital gains from selling U.S. real estate are already subject to a 15% withholding tax on the gross sales price, even if the foreign seller is otherwise exempt from U.S. Tax.

Fortunately, it’s a lot easier to tax real estate than stocks. Which means the easiest thing for the US to tax is simply the dollars coming in.

Unfortunately for those of us residing outside the US, that doesn’t seem that hard to do and does kind of make sense.

STRONGER DOLLAR? WEAKER DOLLAR?

There is another way for the US to target their capital account surplus – the US Dollar.

That could hurt some of us A LOT.

Currency is maybe the #1 underrated consideration for non-US investors in US stocks. Just think about it for a minute.

How many of us have 50%+ US stock allocation? Sure, it seems diversified with Apple (AAPL – NASDAQ), META, some Clorox (CLX – NYSE), McDonalds (MCD – NYSE) and Honeywell (HON – NYSE). But is it really diversified?

It’s not in terms of currency. 50% of your portfolio in US dollars could get ugly if Trump can successfully devalue the dollar.

But will that (and can that?) happen?

The US Dollar is maybe the most confusing of the Trump administration’s objectives.

Trump wants a weak dollar. But policies like tariffs lead to market adjustments that will strengthen the dollar.

Treasury Secretary Scott Bessent did not help matters last week when he said, “we want the dollar to be strong” but also that this “does not mean other countries can have a weak currency policy”.

So stronger dollar? But not against other currencies? Wait, what?

How would Trump get a weaker dollar anyway.

Probably the strangest idea being floated around was brought up by Jim Bianco last weekend.

Bianco is not inclined to make wild claims. Yet he hinted at a unique and probably disruptive way of bringing the dollar down and getting some of the other things that Trump wants done (i.e. lower government debt).

Bianco said that the Trump Administration is toying with the idea of zero-coupon treasury bonds. These are bonds that pay no interest. They would (presumably) be forced on allies in return for “services” – specifically protection from the US military and the role of the US as reserve currency.

What’s more, these bonds may be perpetual, meaning that they have no exchange date!

To be clear – a bond that pays no interest and has no maturity isn’t really a bond – it is more of a claim on USD. Sort of.

The idea seems crazy (but don’t they all?) but being Canadian, and being the butt of Trump taunts for months, it doesn’t strike me as impossible. Strongarming trade partners seems on-point.

After all, Trump clearly has beef with countries not paying their fair share in military spend. Canada, Mexico, NATO countries, maybe even Central and South America, could qualify under his definition of “getting a free ride” on US protection.

This would likely be negative for the USD.

It would weaken its case as a reserve currency (who wants to hold bonds in a country that may effectively default on them, in return for some other no-interest paying bond).

It would also bring to question all those Treasuries not held by friendly Central Banks and whether they may be next.

SO HOW CAN WE MAKE MONEY?

Did you know that before World War I the United States didn’t have any income tax at all?

It’s true. In fact, in you’ve followed Trump’s comments (Trump LOVES to harken back to these old, “glory” days) you already know where most of the tax revenue came from – tariffs.

Apart from tariffs (also called Customs), revenue came from taxes on vices – especially alcohol (the introduction of prohibition was what made taxing income a necessity).

Source: The Annals of American Academy of Political Science and Economics – May 1921

Yoau see where I’m going here. Tariffs. Capital inflow taxes. Zero-coupon Treasuries. It’s all adding up to the need for less internal tax revenue.

Trump LOVES to talk about abolishing income taxes.

While that seems a bit bold (today’s Federal Government is covers Social Security, Medicare, much more defense and these aren’t getting repealed), what I can imagine is a much simpler tax system.

There is already chatter about a flat tax. A simple, single tax rate that everyone pays.

Whatever you might think about the merits of such a proposal, one thing is clear – it will make doing your taxes much easier.

The need for Intuit (INTU – NASDAQ) tax software or H & R Block (HRB – NYSE) tax professionals might be cut off at the knees.

And while I am mostly just spit balling here (after all shaking up the tax system this significantly is something that would take years) you have to wonder if some concerns around the edges have taken the wind out of these stocks.

Source: Stockcharts.com

A short on these names may be a hedge against a capital account attack.

More broadly, I just wonder if the market can withstand all these trade winds.

You add these names to the list of government contractor firms that are being hurt by Elon Musk’s DOGE effort – just take a look at the charts of Booz Allen Hamilton (BAH – NYSE) and DLH Holdings (DLHC – NASDAQ), and it is a lot easier to find losers from the Trump Administration policy then winners.

Which makes me wonder if the easiest (and safest) action is to not play at all.

Which I might do. Just take my money and go BACK home TO INVESTING IN CANADA.

Source: https://oilandgas-investments.com/2025/latest-reports/will-trump-tighten-the-screws-on-capital/