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.
Why Add a Tax to a Tax?
A surtax is not an increase in a particular tax, but a new tax levied on top of another, which can be complicated. This method of taxation is typically used to fund specific programs or time-limited events, such as health-care initiatives or war, but is often kept around far into the future. A universal surtax on personal income was first levied in the U.S. at 10 percent (on top of the existing income tax) for all taxpayers in 1968 to fund the Vietnam War, though the tax was repealed before the end of the war. Today, surtaxes are often levied based on income level, modifying the effective tax rate. One example is the Alternative Minimum Tax (AMT), where filers in higher brackets calculate their taxes owed twice, then pay whichever is higher: the AMT liability or their original individual income tax liability. There are also sales-based surtaxes that vary by state and are often applied on top of so-called “sin taxes,” such as cigarette taxes, to fund prevention and harm mitigation efforts.
Surtaxes are generally easier for governments to manage than for individuals to understand. These are also politically favorable because a candidate can levy a tax on a narrow subset of the electorate and point directly to where the money is going for a particular, often popular, cause.
Are Surtaxes Sound Tax Policy?
The simple answer is no. When considering the four principles of sound tax policy—simplicity, transparency, neutrality, and stability—most surtaxes fail to meet any of these goals.
Surtaxes are not simple or transparent because they add an extra layer of tax for taxpayers to comply with and create a more complex structure that can often obscure true tax burdens. Surtaxes are not stable because they can be unpredictable and temporary. These taxes also fail to meet the principle of neutrality, as they can discourage personal and business decisions.
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