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

November 4, 2009

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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