Interest Equalization Tax

DEFINITION of 'Interest Equalization Tax'

A federal levy on the purchase price on foreign stocks and bonds bought by Americans. The interest equalization tax (IET) was established in 1963 and eliminated in 1974. It was designed to decrease the U.S. balance of payments deficit by discouraging investment in foreign securities and encouraging investment in domestic securities.

BREAKING DOWN 'Interest Equalization Tax'

The IET rate was 15% on stocks and ranged from 1.05% to 22.5% on bonds depending on their maturity. The shortest maturity bonds had the lowest tax rate and the longest maturity bonds had the highest tax rate. The tax was one result of the increasing impact of international economic activities on the United States. An unintended consequence of the IET was to increase activity in the Eurodollar market.