Surtax

Surtax Meaning

Surtax is an extra amount of tax that is charged upon the already existing income tax to fund a specific program of the government and this can be a percentage of a certain amount or a flat dollar rate which individuals are bound to pay.

Example of Surtax

  1. Obama is launching additional medicare tax in the US above the already existing medicare tax, where an additional 0.9% was being charged above the already existing 1.45% medicare tax for individuals earning above $200,000 and a couple earning above $250,000.
  2. In 1968 the then President of United States implied a 10% surtax for taxpayers well and above their regular tax rate to support the funding activity for the Vietnam war.
  3. Germany introduced solidarity tax with a flat tax rate of 7.5% after East and West Germany were merged, which later in 1998 the Surtax was reduced from 7.5% to 5.5%.
Surtax

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Effects

The various effects are as follows:

Surtax Rate

In the US, Surtax was originally introduced at a 10% rate for all taxpayers above their regular tax rate by the President in 1968 to support the Vietnam War. At present, it is more progressive considering the US a developed nation where the Surtax is charged based on income, which means a higher income individual will end up paying more tax than a lower bracket individual. A person who falls under 20% bracket of income tax is being charged 10% over it, which takes the effective tax rateEffective Tax RateEffective tax rate determines the average taxation rate for a corporation or an individual. For both, there is a similar formula only with variation in considering variables. The effective tax rate formula for corporation = Total tax expense / EBTread more to 22% overall, and a 50% bracket individual has to shell out again an overall effective tax of 55%.

The US has also introduced a sales surtax rate, which varies from state to state and is generally between 0.5% to 1.5%. These rates are generally charged to small counties on and above the general tax rate.

Advantages

Several advantages are as follows:

Disadvantages

The disadvantages are as follows:

  • It unnecessarily creates an additional burden for the taxpayers who have to pay extra tax apart from their regular income tax.
  • At times funds may be raised to safeguard the nation from war or prepare for a war, which is not a great option as war only brings about destruction.
  • Since it is a mandatory aspect of government, every taxpayer is bound to shell the amount even if he/she is not benefited by it or the scheme for which it has been raised.
  • It minimizes the savings level among the citizens since the amount they shell under the Surtax could have been invested in some other avenues generating better returns.

Conclusion

Surtax has both advantages and disadvantages considering the level of income and usage for which it is being raised. Such tax, which is raised for better amenities or medicare, can be considered a boon for the citizen since all are liable to gain benefits out of it.

Recommended Articles

This article has been a guide to Surtax and its meaning. Here we discuss examples, effects, and rate of Surtax along with advantages and disadvantages. You may learn more about financing from the following articles –

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