Surtax

A surtax is an additional tax that is imposed on top of any existing business or personal taxes. It may have a flat or graduated rate structure. Surtaxes are often implemented to finance a particular project or effort, as opposed to the money from more general taxes, such as the individual income tax, which typically finance a wide range of projects and services.

Understanding Surtax

Surtaxes are often levied to pay a specific government programme, whereas conventional income taxes or sales taxes are levied to fund a wide range of programmes. As a result, one distinguishing aspect of a surtax is that it allows people to more quickly observe how much money the government collects and spends for a specific programme.

For example, President Lyndon B. Johnson enacted 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 percentage of their tax dollars going towards military spending, they could plainly see how much additional money they were being asked to contribute particularly to the war effort.

Advantages and Disadvantages of Surtax

Advantages

It can assist the government in funding specific programmes aimed at improving society as a whole. During times of conflict, it can give additional funding to assist protect the nation. The rate charges are more transparent in this case since the taxpayer is informed of the programme and how the money is being spent.

It's a more progressive tax system because it charges varying rates to different income levels of taxpayers. It can assist the government in providing better plans linked to health or any other element to its residents by obtaining additional revenue in the form of this tax.

It doesn't damage the wallet much because the government's required amount is divided among all taxpayers.

Disadvantages

It unduly increases the burden on taxpayers who must pay additional taxes on top of their usual income taxes. Occasionally, money may be gathered to protect the country from war or to prepare for a conflict, which is not a wise choice because war only causes destruction.

Every taxpayer must pay the required amount since it is a requirement of the government, even if they are not helped by the programme for which it is raised. It reduces citizens' savings levels since the money they pay in Surtax may have been invested in other areas that would have produced higher returns.

Special Considerations

In nations with a progressive tax system, like the U.S., the surtax is substantially higher for taxpayers with higher incomes. For instance, a taxpayer who was in the 20% income tax band in the 1960s will pay 20% + (0.1 x 20%) = 22% once the 10% surtax has been implemented. However, a higher income person who is liable to both the 10% surtax and the 50% marginal tax rate will pay 50% + (0.1 x 50%) = 55%.

Key Takeaways

A surtax is a government-imposed supplementary tax that is levied on taxpayers in addition to another tax. When the government needs to generate money for a particular programme, such a health or military project, a surtax is typically levied.

Sales taxes and income taxes are different in that they support numerous programmes as opposed to simply one. The amount of a surtax is determined either as a fixed monetary amount or as a percentage of a certain sum.