Question

The social security tax is 6.2% on employees’ income earned below $113,000. Is this tax progressive, regressive or proportional?

a) Progressive
b) Regressive
c) Proportional
d) Depends on the income bracket

Answer 1

The Social Security tax is regressive because it is imposed only up to a certain income level, which means lower-income earners pay a higher percentage of their total income compared to higher-income earners. The tax is proportional only up to the wage limit but becomes regressive for incomes above the $113,000 cap.

Step-by-step explanation:

The Social Security tax is considered regressive because it imposes a higher tax rate on lower-income earners and a lower tax rate on higher-income earners. This is due to the fact that the tax is capped at an income level of $113,000; thus, any income above that threshold is not subject to the 6.2% tax. As a result, individuals with lower incomes pay the tax on a larger proportion of their total income compared to wealthy income earners, who pay the tax on a smaller proportion of their total income once their earnings exceed $113,000.

We see that the Social Security payroll tax is proportional up to the wage limit as it applies the same percentage across all income up to the cap. However, because that tax percentage does not apply to earnings above the wage cap, the overall effect of the tax becomes regressive.