12. Editorial Note
On September 2, 1964, President Johnson signed into law P.L. 88–563, formally known as the Interest Equalization Tax. (H.R. 8000, 88th Congress; 78 Stat. 809) This tax was designed to increase the cost to foreigners of obtaining long-term capital in the United States. It was intended to reduce a heavy outflow of dollars resulting from borrowing and stock issues of foreign governments and businesses in the United States, which was a major factor in the balance-of-payments deficit.
President Kennedy first introduced the idea of an Interest Equalization Tax in a special message he delivered to Congress on July 18, 1963. For text, see Public Papers of the Presidents of the United States: John F. Kennedy, 1963, pages 574–584.
The tax was designed to increase the cost of foreign borrowing in this manner: Americans would pay a tax (at rates provided in the bill) when they acquired a foreign security (primarily stocks or bonds). It was expected that the American purchasers would pass on the extra cost of the tax to the foreigner either through charging a higher interest rate on a loan or by demanding a discount on the purchase of stock. The tax rates provided in this law were designed to increase the cost of borrowing in the United States by about 1 percent. With that increase, the cost of obtaining capital in the United States was expected to be at a level comparable with European markets and, the administration hoped, make the American markets less attractive to foreigners. Less foreign borrowing would cut the outflow of dollars from the United States and improve the nation’s balance of payments. (Congressional Quarterly Almanac, volume XX, pages 545–550)
On the same day, September 2, 1964, President Johnson issued Executive Order 11175 (29 Federal Register, page 12605) exempting the application of the Interest Equalization Tax to the acquisition by a U.S. citizen of stock or debt obligation of Canada. The exemption had been discussed with Canadian representatives in July 1963. (For text of a joint U.S.-Canadian statement on the proposed Interest Equalization Tax, dated July 21, 1963, see Department of State Bulletin, August 12, 1963, page 256.) On September 3, President Johnson issued Executive Order 11176, which allowed for the inspection of certain Interest Equalization Tax information returns by the Board of Governors of the Federal Reserve System and the Federal Reserve Banks. (Circular telegram 437, September 4; Department of State, Central Files, FN 16 US)