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
- 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.
- 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.
- 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%.
The various effects are as follows:
- It creates an additional burden for the taxpayer who, along with payment of regular tax, has to pay an extra tax too mandatorily.
- The government, on the other hand, can easily fund their specific program with the help of taxpayers who will have better transparency about where this part of the money is being utilized.
- It makes the nation more progressive as some surtax are higher for higher-income people, so depending on the income, the nation collects this additional fund for its welfare and development.
- It can facilitate the government to provide or create a separate provision for better amenities for its citizens.
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 rate 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.
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Several advantages are as follows:
- It can help government fund specific programs aimed at the betterment of society as a whole.
- At times of war, it can provide additional funds that can help safeguard the nation.
- The rate charges here have better transparency as the taxpayer is aware of the program, where the money is being utilized.
- It’s a kind of more progressive tax system since it is charged differently for taxpayers with different levels of income.
- It can help the government provide better schemes related to health or any aspect to its citizens with the help of raising additional funds in the form of this tax.
- It doesn’t hurt the pocket a lot since the considered amount required by the government is split into all the taxpayers based on their income level.
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.
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.
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 –