Question

The social security tax is an example of a __________tax structure because as the tax base increases, the taxes paid increase, but the marginal tax rate decreases.

Answer 1

The Social Security tax is a regressive tax structure where the marginal tax rate decreases for high-income earners because the tax is only applied up to a certain income level; it is proportional below this level.

Step-by-step explanation:

The Social Security tax exhibits characteristics of a regressive tax structure. This means as the tax base increases, the amount of taxes paid also increases, yet the marginal tax rate actually decreases for higher income earners. The reason behind this is that Social Security tax is only applied to the first $118,500 of an individual's income (as of 2015). Therefore, individuals who earn more than this threshold will pay the same total amount in Social Security taxes as someone who earns exactly $118,500, making their effective tax rate lower as their income increases.

At the same time, the Social Security tax is proportional up to that wage limit, because everyone pays the same flat percentage of their income. However, for any income above the cap, no Social Security tax is levied, which shifts the tax burden proportionally more onto lower and middle-income earners, and less so on higher-income individuals.