Senator Marco Rubio (R-FL) and Representative John Moolenaar (R-MI) are introducing the Patriotic Investment Act, which would make gains from investments in China and China-related companies subject to regular income tax rates and not the preferential rate for capital gains, PolicySphere can exclusively report.

The bill would reclassify gains from the sale of "disqualified PRC securities" as ordinary income, subjecting them to the standard income tax rate rather than the lower, preferential, capital gains rate. These securities are broadly defined to include interests in Chinese government entities, companies, and individuals with significant ties to China or the CCP. The legislation provides a six-month grace period for divestment after enactment and offers investors the option to pay the resulting tax liability in three annual instalments. Additionally, the bill would deny foreign tax credits for income related to the disposition of these securities.

“The capital gains tax rate was meant to encourage investment in American innovation, not fund an oppressive communist regime, but Wall Street continues to give money to our adversaries and reap rewards from the American tax system. Enough is enough. My Patriotic Investment Act will level the playing field and ensure that our tax code no longer encourages investments that undercut American businesses and workers,” Senator Rubio told PolicySphere.

Senator Rubio, of course, has long been at the forefront of legislative efforts to address the challenges posed by China's economic and military rise. His introduction of the Patriotic Investment Act is consistent with his track record as a China hawk in Congress. Previously, Rubio has sponsored or co-sponsored numerous bills targeting various aspects of U.S.-China relations, including the Uyghur Forced Labor Prevention Act, which became law in 2021. And his office has recently produced an excellent report on Chinese manufacturing. More broadly, Senator Rubio has been one of the most creative and innovative policy thinkers in Congress ever since he got there.

Congressman Moolenaar, meanwhile, became chair of the Select Committee on the Chinese Communist Party in 2024, succeeding Mike Gallagher, and has been at the forefront of legislative efforts aimed at countering CCP threats. Molenaar played a key role in the House's "China Week" earlier this month, during which the chamber passed 25 anti-China bills. We particularly like Molenaar's framing that, when assessing threats from Chinese companies, we should look for "loaded guns" rather than "smoking guns."

Here's what Congressman Moolenaar told us about the Patriotic Investment Act: “For too long, Americans investing in China’s military-industrial complex have been given unfair tax breaks that allow them to profit from funding our adversary. That’s wrong and Senator Rubio and I are introducing this legislation to put a stop to this special treatment. Our nation’s tax code should be incentivizing investment in the United States, not collaboration with the CCP.”

So what of this bill? Let's talk politics, policy, and process.

Politics: It's a statement of where we've come in terms of the current political realignment that two Republican members of Congress can just propose a bill increasing taxes on investment without apology or equivocation. It will be interesting to see if the bill garners some bipartisan cosponsors. It probably could attract some, though it's hard to see the Democratic (or Republican, for that matter) leadership supporting it. That being said, the bill would definitely poll very well if polled, so it's a possibility.

Policy: The economic impact of the bill will surely be positive. More and more companies are realizing that in many cases investment in China and China-related companies is a scam.

The impact on the budget should be negligible either way, given that capital gains are a small slice of overall taxation, and this affects only a fraction of that. It would be positive for the budget, not just through increasing taxes on investments in China, but also potentially through boosting investments in the US.

When it comes to Chinese companies that are publicly listed in the West or in jurisdictions with Western-style legal systems like Hong Kong, very often the entity whose stock is listed is not the actual company but some shell company linked to some shell company linked to the actual company. Western investors found out the hard way when Jack Ma, owner of the Chinese internet conglomerate Alibaba, decided to spin off its popular Alipay online payments service, into a different company, without compensating Western shareholders. Those shareholders were under the illusion that they owned Alibaba, which included Alipay, and therefore that they would be compensated in some way for the divestment of that asset, but since they only owned a shell company, Ma could reshuffle Alibaba's assets at will and essentially steal from his Western shareholders (benefiting himself, since he had ownership of the assets where the actual value lay).

And when it comes to direct investment in Chinese companies, more and more business leaders are becoming aware of what the economics blogger Noah Smith has called, very accurately, "the China cycle." The China cycle goes like this:

1. Initial Entry: A Western multinational company establishes factories in China, attracted by low production costs, large contracts, and the potential of the Chinese market.

2. Technology Transfer: Chinese entities acquire the multinational's technology through various means, including joint ventures, acquisitions, reverse engineering, and sometimes industrial espionage.

3. Domestic Adoption: The acquired technology is disseminated to Chinese domestic companies.

4. Market Dominance: Chinese companies use this technology plus CCP subsidies to outcompete the multinational in the Chinese market.

5. Global Expansion: Chinese firms then leverage their domestic success to compete with the multinational in global markets.

The latest such example is Tesla, which is getting its clock cleaned in China by BYD, which has copied Tesla's technology and is being massively subsidized by the CCP to outcompete Tesla in China and, soon, or so the CCP hopes anyway, flood the US and Europe with cheap EVs. In other words, investing in China is a trap, and it penalizes not just the broad economic and national interests of the United States, but also, in very many cases, the private interests of those doing the investment.

Process: It's hard to imagine the bill reaching the finish line in this Congress, but it must be seen as putting down a marker for the next Congress, and the next Administration. With a probable Senate majority and a possible House majority, the bill could get quite far. Of course, much will depend on the next Administration. But what will matter most is the big tax fight that everyone is expecting in 2025, as the TCJA is up for renewal. That's when, given both sides' tax cut promises and the reality of the deficit, everyone will be looking for revenue raisers. So the sponsors might look to attach this bill to the tax bill that comes up next year.