DEFINITION of Surtax
A surtax is a tax levied on top of another tax. The tax can be calculated as a percentage of a certain given amount or it can be a flat dollar charge.
A surtax is also known as a tax surcharge.
BREAKING DOWN Surtax
A surtax is generally assessed to fund a specific government program, whereas regular income taxes or sales taxes are used to fund a variety of programs. Thus, one unique feature of a surtax is that it allows taxpayers to more easily see how much money the government is collecting and spending for a particular program. For example, in 1968, President Lyndon B. Johnson enacted a 10% surtax on individual and corporate income to help pay for the cost of fighting the Vietnam War. The surtax was collected on income after the ordinary federal income tax was assessed. While most taxpayers probably did not know what percentage of their tax dollars were going toward military spending, they could easily see how much extra money they were being asked to contribute specifically to the war effort.
The surtax is much higher for taxpayers with higher incomes in countries with a progressive tax system like that of the U.S. For example, a taxpayer who fell in the 20% income tax bracket in the 1960s will pay, after the 10% surtax has been applied, 20% + (0.1 x 20%) = 22%. But a higher income earner subject to 50% marginal tax rate and the same 10% surtax will pay 50% + (0.1 x 50%) = 55%.
A surtax is typically applied to the income of individuals and businesses whose income exceed a certain threshold. For example, the solidarity tax and wealth tax are examples of surtax imposed on taxpaying entities with income above a specified level. In France, the wealth tax, locally known as Impôt de solidarité sur la fortune (ISF) or solidarity tax on fortunes, is paid by an estimated 350,000 households with a net worth of more than €1.3 million.
The surtax is an additional tax on income that is already taxed. Germany introduced a solidarity tax with a flat rate of 7.5% on all personal income in 1991 after East and West Germany were joined together again. The surtax was reduced to 5.5% in 1998, which applied to the yearly corporate and individual tax bill of taxpayers towards the solidarity tax. The purpose of the tax was to provide capital for the newly integrated administration. As another example, in 2013, the Obama administration implemented a 0.9% surtax on Medicare. In effect, the tax is levied on top of the Medicare tax already paid by taxpayers and is formally called the Additional Medicare Tax. It applies to wages and self-employment income above $250,000 per couple or $200,000 for a single. For an employee who earns more than $200,000, s/he will be taxed the regular Medicare tax of 1.45% on the first $200,000 of compensation plus 0.9% surtax on any excess amount over $200,000.