How Much Do “Surtax Returns” Already Pay in Federal Income Taxes?

November 4, 2009

Gerald Prante

Gerald Prante

The Tax Foundation has received requests as to the amount of federal individual income taxes that are paid by those that would be hit by the proposed surtax in the House health care bill. Most know that the top 1 percent of tax returns remit approximately 40 percent of federal individual income taxes. The surtax that has been proposed would not hit all tax returns in the top 1 percent…only a sliver of it. In fact, the surtax would only hit approximately 0.3% of all tax returns.

On the other hand, as the table below shows, while the number of tax returns that would be hit by the surtax is relatively small, these tax returns make up a significant fraction of income and pay a disproportionate share of the current tax bill. For example, if the Bush tax cuts were fully extended into 2011, those in this “surtax” category would pay approximately 27.6 percent of federal individual income taxes. Now if the tax cuts are extended for everybody except those at the top*, these “surtax returns” would be paying over 32 percent of all federal individual income taxes. Finally, if the surtax were to go through on top of the expiration of the Bush tax cuts for high-income tax returns, those returns hit by the surtax would be paying 35.6 percent of federal individual income taxes.

The 5.4% surtax on adjusted gross income (AGI) proposed in the House bill would be levied on joint returns with AGI of $1 million or more ($500,000 for single returns).

Share of Tax Returns

Share of Adjusted Gross Income

Scenario 1:
Share of tax under 2010 Law Extended

Scenario 2:
Share of tax under Scenario #1 except tax cuts expire for high-income tax returns

Scenario 3:
Share of tax under Scenario #2 plus 5.4% surtax proposed in House bill

SURTAX RETURNS

0.35%

13.82%

27.63%

32.15%

35.60%

NON-SURTAX RETURNS

99.65%

86.18%

72.37%

67.85%

64.40%

Notes

(1) Expiration of Bush tax cuts is assumed to be top two rates going back to 36% and 39.6%, capital gains and dividends being taxed at 20%, and the return of the phase-outs of personal exemptions and itemized deductions (in full). AMT is assumed to be patched in each of the three scenarios. Shares of taxes paid do not include the effects of refundable tax credits. (In other words, floor of zero on income tax is assumed, which would make the tax share of high-income returns lower than it would be if negative taxes were added to the total.)

(2) Federal individual income taxes is not the only tax that households pay, but is arguably the most progressive with the possible exception of estate tax and corporate income tax, depending upon assumption of economic incidence. Speaking of economic incidence, analysis assumes that income taxes are borne by those that remit the check to the IRS. This is technically not entirely true. To some extent, higher taxes on high-income tax returns will be borne by those that are not high-income.

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A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

A surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services.

A refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit.

An estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs.

An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.

A corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.

Adjusted gross income (AGI) is a taxpayer’s total income minus certain “above-the-line” deductions. It is a broad measure that includes income from wages, salaries, interest, dividends, retirement income, Social Security benefits, capital gains, business, and other sources, and subtracts specific deductions.