It was meant to make it less profitable for U.S. investors to invest abroad by taxing the purchase of foreign securities.
By increasing the price of the security, investors will buy fewer of them, all else equal.
With fewer domestic investors purchasing foreign securities, capital outflows will be lower, thereby reducing the balance-of-payments deficit.
Since many factors influence the balance-of-payments account, the effect of the tax is unclear.
The interest equalization tax "brought American investment activity in foreign markets to a virtual standstill.