Purpose
The purpose of the tax was to decrease the balance of payments deficit in the US. This was achieved conceptually by making investments in foreignDates Effective
The tax was effective on purchases made after July 18, 1963. It was scheduled to expire on January 1, 1966, but was extended multiple times, and eventually abolished on January, 1974.Amount of the tax
* For foreign stocks, the tax is 15% of the price * For debt obligations there is a range between the following bounds: # For debt obligations having 3 to 3.5 years remaining until maturity, the tax is 2.75% of purchase price # For debt obligations having 28.5 years remaining until maturity, the tax is 15% of purchase priceExemptions
* Debt obligations with less than 3 years remaining until maturity * Investments in developing countries * Investments that result in the U.S. citizen owning a 10% or more voting stock in the foreign corporation * Debt obligations that were issued to a U.S. person in order for that foreign corporation to purchase U.S.-produced goods * Foreign securities that would endanger international monetary stability. The President will determine if any foreign securities qualify for this exemption. Canadian-issued securities were the only initial exemption from the tax in 1963 * Debt obligations acquired by commercial banks to make loans (deposits, etc.) * Insurance companies who invest in foreign securities with premiums collected from foreigners * Labor unions that invest in foreign securities with the money from dues collected abroad from foreign members *Investment banks that underwrite foreign securities are exempt from the tax when they acquire and resell such securities from the corporation *U.S.-controlled foreign corporations (>50% owned by U.S. persons and registered on U.R. securities exchanges)Estimated Revenue
The tax was expected to raise $30 million per year.Effect on the Deficit
As the original intent of the Interest Equalization Tax was the reduce the balance-of-payments deficit, a majority consider the tax successful. * Between 1961 and 1964, the deficit averaged $2.5 billion * In the years 1965 to 1966, the deficit averaged $1.1 billion * In 1967, the deficit was $3.5 billion * In 1968, there was a surplus of $93 million Since many factors influence the balance-of-payments account, the effect of the tax is unclear. However, there was a positive trend in the years after it was enacted.Effect on Financial Markets
The interest equalization tax "brought American investment activity in foreign markets to a virtual standstill." However, financial markets responded over time with massive evasion of the tax, along with the development of theReferences
{{reflist United States federal taxation legislation