Surtax Definition

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Surtax Definition

What Is a Surtax?

A surtax is a tax that is applied in addition to another tax. The tax might be computed as a percentage of a certain amount or as a fixed cash fee.

A surtax is also known as a tax surcharge.

Key Takeaways

  • A surtax is a tax levied by the government on taxpayers in addition to another levy.
  • Surtaxes are often levied when the government want to collect cash for a particular program, such as a health or military project.
  • Income taxes and sales taxes vary in that they finance many programs rather than just one.
  • A surtax is either a fixed money amount or a percentage of a certain amount.

Understanding Surtax

Surtaxes are often levied to pay a particular government program, while ordinary income taxes or sales taxes are levied to fund a wide range of activities. As a result, one distinguishing aspect of a surtax is that it enables people to more quickly observe how much money the government collects and spends on a certain program.

For example, President Lyndon B. Johnson levied a 10% surtax on individual and corporate income in 1968 to assist fund the Vietnam War. The surtax was levied on income after the regular federal income tax was calculated. While most taxpayers were probably unaware of the amount of their tax dollars going toward military expenditure, they could plainly see how much more money they were being asked to donate particularly to the war effort.

Special Considerations

In nations with a progressive tax system, such as the United States, the surtax is substantially greater for higher-income people. For example, a taxpayer in the 20% income tax band in the 1960s will pay 20% + (0.1 x 20%) = 22% after the 10% surtax is imposed. A higher-income person subject to the 50% marginal tax rate and the same 10% surtax, on the other hand, will pay 50% + (0.1 x 50%) = 55%.

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Surtax Examples

Individuals and corporations whose income surpasses a specific level are often subject to a surtax. Surtaxes levied on taxpaying entities with revenue over a certain threshold include the solidarity tax and the wealth tax. In France, an estimated 350,000 families with a net worth of more than €1.3 million pay the wealth tax, known locally as Impôt de solidarité sur la fortune (ISF) or solidarity tax on fortunes.

The surtax is an extra tax on previously taxed income. Following the reunification of East and West Germany in 1991, Germany imposed a solidarity tax of 7.5% on all personal income. In 1998, the surtax was cut to 5.5%, which was applied to taxpayers’ annual business and individual tax bills in order to fund the solidarity tax. The tax was intended to generate funds for the newly consolidated government.

As another example, the Obama administration imposed a 0.9% surtax on Medicare in 2013. The tax, which is properly known as the Additional Medicare Tax, is charged on top of the Medicare tax previously paid by taxpayers. It applies to earnings and self-employment income above $250,000 for a married couple or $200,000 for a single individual. Employees earning more than $200,000 are subject to the usual Medicare tax of 1.45% on the first $200,000 of salary, plus a 0.9% surtax on any amount beyond $200,000.

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