What Is a Solidarity Tax and How Does It Work?
Learn how a solidarity tax functions as a supplemental surcharge on an existing tax liability, allowing governments to fund specific national objectives.
A solidarity tax is a supplemental levy imposed by a government on its taxpayers. The purpose of this tax is to generate revenue for specific, large-scale national endeavors that require funding beyond the normal budget, such as recovering from a natural disaster or addressing a significant economic challenge. This type of tax is not a standalone system but is levied in addition to primary taxes like individual or corporate income tax. It is typically structured as a temporary measure, designed to be in effect only as long as needed to fund the specific goal for which it was created.
The German Solidarity Surcharge
Germany’s Solidaritätszuschlag, often called the “Soli,” is a prominent real-world example of a solidarity tax. It was first introduced in 1991 to help cover the costs associated with the reunification of East and West Germany. The financial challenge of integrating the former German Democratic Republic led to the tax’s reintroduction in 1995.
The tax was levied at a rate of 5.5% and was applied as a surcharge on the income tax liability of individuals and the corporate tax liability of companies. For decades, the revenue was a source of funding for the economic development and integration of the eastern German states.
A major reform in 2021 fundamentally altered the Soli’s application, abolishing the tax for approximately 90% of individual taxpayers. This was achieved by significantly raising the income thresholds at which the tax becomes due, providing financial relief to low- and middle-income earners.
No solidarity surcharge is levied on income tax liability below certain annual thresholds. Above these amounts, the tax is phased in through a sliding scale. Only those with very high incomes pay the full 5.5% surcharge. Corporations and recipients of capital gains income also remain subject to the full 5.5% surcharge on their tax bills. There is no separate tax return for the Soli; it is calculated and paid with the primary tax.
Global Implementations and Variations
The concept of a solidarity tax has been adapted by various nations to address different circumstances, showcasing its flexibility. These applications can be structured to target wealth, fund crisis recovery, or support specific social programs, rather than just supplementing income tax.
France provides a notable example with its former solidarity tax on wealth. The Impôt de Solidarité sur la Fortune (ISF) was an annual tax levied on the global net worth of households exceeding a certain threshold. Unlike the German surcharge on income tax, the ISF was based on a taxpayer’s total assets, including real estate and financial investments, minus debts. In 2018, the ISF was replaced by a more narrowly focused wealth tax on real estate assets.
Other countries have used solidarity surcharges for more immediate crisis response. Japan introduced a special 2.1% surtax on income tax, scheduled to be in effect until 2037, to help finance reconstruction efforts following the 2011 earthquake and tsunami. The economic fallout from the COVID-19 pandemic also prompted some nations, particularly in Latin America, to implement temporary solidarity levies on high incomes or wealth to fund healthcare and recovery packages.
Spain also introduced a “Solidarity Tax for High Net-Worth Individuals” as a complement to its existing wealth tax. While initially presented as a temporary measure, its application has been extended. This tax targets individuals with a net wealth exceeding €3 million.
Calculation and Application
The calculation of a solidarity tax is structured as a surcharge on a taxpayer’s primary tax liability. This means the tax is not calculated on gross income but is figured as a percentage of the main tax owed, such as annual income tax. This method makes it an add-on to an existing tax bill.
First, the taxpayer’s main tax obligation is calculated according to standard tax law. The government-mandated surcharge rate is then applied to this tax liability to determine the additional amount owed.
For a hypothetical example, consider an individual whose income tax for the year is calculated to be $20,000. If the government has imposed a solidarity surcharge of 5.5%, the surcharge amount would be $1,100, which is 5.5% of the $20,000 income tax bill. The individual’s total tax payment for the year would then be $21,100.
This method ensures that the burden of the surcharge is proportional to the taxpayer’s primary tax liability. The collection is also streamlined, as the surcharge is reported and paid on the same tax forms and at the same time as the underlying tax.