Final answer:
The question addresses the tax treatment of Social Security benefits, highlighting the regressive nature of payroll taxes which cap contributions at a specified income level, leading to a lower tax burden for high-income earners compared to lower income earners. Medicare tax, however, has no income ceiling.
Step-by-step explanation:
The student's question pertains to the taxation of Social Security benefits for high-income taxpayers. In the context of the United States, Social Security benefits serve as a crucial source of income for many retirees. While the federal income tax implements progressive rates that increase with income, payroll taxes for Social Security are capped, resulting in a regressive effect where high-income earners pay a lower percentage of their total income.
Workers and employers each contribute 7.65% of income to Social Security up to an annual limit, which was set at $118,500 in 2015. Income above this threshold is not subject to Social Security payroll taxes, which translates to a lower overall tax rate for individuals with higher incomes. Additionally, 85% of Social Security benefits are included in income for tax purposes for high-income earners. This system of taxation leads to lower income earners bearing a relatively higher tax burden in proportion to their income, showcasing the regressive nature of the tax.
Medicare taxes, unlike Social Security taxes, do not have an income ceiling and remain fixed at 2.9%, which also impacts taxpayers differently based on their income levels. Given the importance of these benefits, especially for those aged 85 and older, understanding their tax implications is critical.