Interest Equalization Tax (IET)

What Is the Interest Equalization Tax (IET)?

The interest equalization tax (IET) was a federal levy on the purchase price of foreign stocks and bonds bought by Americans. The IET was laid out in 1963 as a domestic tax measure by then-President John F. Kennedy. The IET was killed in 1974.

At the time it was presented, the IET was intended to diminish the U.S. balance of payments deficit by putting investment in foreign securities and empowering investment in domestic securities down. The IET made it less beneficial for U.S. investors to invest abroad. By expanding the price of a security, lessening the federal deficit yet to be determined of-installment by cutting down the ratio of capital outflows was likewise implied.

Understanding the Interest Equalization Tax (IET)

The IET had different tax sums in view of the sort of stock and the debt obligation appended to it. For instance, the IET rate was 15% on foreign stocks, and it went from 1.05% to 22.5% on bonds, contingent upon their maturity. The most brief maturity bonds had the least tax rate and the longest maturity bonds had the highest tax rate. Debt obligations that had 3 to 3.5 years until stock maturity were taxed at 2.75% of the purchase price, while debt obligations with 28.5 years term maturity on them carried the original 15% tax rate.

The tax was one aftereffect of the rising impact of international economic activities on the United States. The tax likewise had the potentially negative result of expanding activity in the Eurodollar market.

History of the Interest Equalization Tax (IET)

The Interest equalization tax was never intended to be a dependable tax measure. Fate has smiled down from heaven transitory — it really endured longer than recently anticipated. At the point when the IET was first endorsed into law on July 18, 1963, it contained an expiration date of January 1, 1966. It was extended and once again extended on different occasions until its last expiration in 1974. The IET was anticipated to raise a rough sum of $30 million for every year it was in effect. With the anticipated sum — and in light of the fact that the tax was laid out as a method for decreasing the balance-of-installment deficit — by and large, the IET is considered to have worked for its planned purpose.

Before the IET was laid out, in the years somewhere in the range of 1961 and 1964, the US balance-of-installment deficit was averaging around $2.5 billion. In the years right after the IET was put into effect, the deficit dropped essentially, to $1.3. billion by 1966. The next year, the deficit rose to even more, at $3.5 billion. Yet, by 1968, the IET had canceled the deficit totally and supplanted it with a surplus of $93 million.

Features

• The interest equalization tax (IET) was a federal levy on the purchase price of foreign stocks and bonds bought by Americans.
• The IET was laid out in 1963 as a domestic tax measure by then-President John F. Kennedy; it was dispensed with in 1974.
• At the time it was presented, the IET was intended to diminish the U.S. balance of payments deficit by beating investment in foreign securities and empowering investment in domestic securities down.