Definition
Surtax is an additional tax levied on an already taxed item or income. It is usually expressed as a percentage and is over and above the regular taxes imposed. Generally, it is used by governments in situations where additional revenue is required for specific purposes.
Key Takeaways
- Surtax is an additional tax imposed on something that is already taxed. Essentially it is a tax on a tax, usually levied on high income earners or corporations, to generate additional revenue.
- Often used in a progressive taxation system, surtax is intended to offer tax relief to low or middle-income earners while taxing the wealthy at a higher percentage. This can serve as a method of wealth redistribution or can be used to fund certain governmental programs or initiatives.
- The imposition of a surtax can affect the behavior of the taxed entity. For individuals and corporations, it may influence financial decisions, with the possibility to encourage tax avoidance or evasion strategies. Therefore, policymakers need to balance revenue generation and the potential negative economic impact.
Importance
Surtax is a critical concept in finance as it pertains to an additional charge or tax imposed on an already existing tax liability.
A government can implement this to generate extra revenue or deter specific activities or behaviors.
Surtax could significantly impact an individual’s or a business’s overall tax responsibility, hence their financial strategy.
Moreover, such kinds of taxes can be used as fiscal tools to redress economic inequalities, meaning they often steeply impact high-earning individuals or profitable companies.
Therefore understanding surtax is important for strategic planning in personal finances, business operations, and even at the macro-economic level for policy formulation.
Explanation
A surtax serves the purpose of generating additional revenue, typically for a specific cause or program. The government often levies surtaxes during times of war or economic hardship to fund necessary expenses without drastically altering the existing tax code.
Surcharges might also be levied to fund specific initiatives or reforms, like healthcare reforms or infrastructural development. By applying this additional charge to existing taxes, the government can raise revenue in a more targeted way, often from those with broader fiscal shoulders or those engaging in certain behaviors.
The application of a surtax is not limited to income tax; it can be applied to all kinds of taxes like corporate taxes, sales taxes, or excise taxes among others. For example, a surtax may be levied on items that the government wants to disincentivize, such as luxury goods, tobacco, or alcohol.
These are also known as “sin taxes” and are meant to deter harmful behaviors while providing additional funding for societal needs. Overall, the use of a surtax provides the government with a flexible tool to meet evolving fiscal demands without overhauling the existing tax system.
Examples of Surtax
Luxury Goods Surtax: Many countries levy a surtax on luxury goods. For instance, in the US, there was a 10% surtax placed on the purchase of luxury boats and fancy cars in the early 1990s. The purpose of this surtax was to raise additional revenue from people who could afford to buy such expensive items.High Income Earner Surtax: In some regions, a surtax is sometimes levied on individuals making a high level of income. This is often viewed as a way to ensure wealthier people pay more in taxes. For example, in 2013, an Affordable Care Act surtax was implemented in the United States that subjected high-income earners to an additional
8% tax on certain types of income to fund healthcare reforms.Corporate Earnings Surtax: Some countries impose a surtax on corporations with high earnings. In Canada, for example, a large corporation surtax of
5% was imposed on the taxable income over $10 million, until it was phased out inIn each of these cases, the surtax comes on top of the existing tax, providing a means for governments to raise additional revenue.
FAQs about Surtax
1. What is surtax?
Surtax is an additional tax levied on something that is already taxed. It is typically imposed on certain types of income or properties as a way to generate additional revenue.
2. How does surtax work?
Surtax is typically applied as a percentage on top of the standard tax rate. For example, if the regular tax rate on an item is 10% and there is a 5% surtax, the total amount of tax paid would be 15%.
3. Who has to pay surtax?
Who pays surtax depends on the type of tax and the jurisdiction. It could be levied on businesses, individuals or specific demographic groups, such as high-income earners.
4. What’s the difference between a surtax and a regular tax?
In essence, a surtax is a tax on a tax. While a regular tax is a direct charge on income, purchases or property, a surtax is an additional charge applied to the existing tax.
5. Can surtaxes be deducted on my tax return?
Whether or not a surtax can be deducted on a tax return depends on the specific tax laws in your jurisdiction. Some surtaxes may be deductible while others are not.
Related Entrepreneurship Terms
- Progressive Taxation
- Income Tax
- Corporate Tax
- Tax Brackets
- Fiscal Policy
Sources for More Information
- Investopedia – A comprehensive resource for learning about finance and investing concepts including surtax.
- Internal Revenue Service (IRS) – Official U.S. government site providing tax information, publications and guidelines.
- Encyclopedia Britannica – Online version of the well-known encyclopedia, providing overview and detailed information about various topics including surtax.
- Urban-Brookings Tax Policy Center – A joint venture of the Urban Institute and Brookings Institution, it provides independent analyses of tax issues.
