Chapter 7: Problem 7

Which statement is true? (LO5) a) Bill Gates pays more Social Security tax than most American workers. b) The rich pay a higher proportion of their income in Social Security tax than in federal personal income tax. c) Most wage earners pay more in federal personal income tax than in Social Security tax. d) The rich pay Social Security tax on nearly their entire income.

Short Answer

Expert verified

Option (c) – "Most wage earners pay more in federal personal income tax than in Social Security tax" – is the true statement.

Step by step solution

Review the Social Security tax system

Social Security tax is a payroll tax, which means both employees and employers contribute to it. In 2021, employees and employers each pay Social Security tax at a rate of 6.2% on earned income, up to a maximum taxable income of $142,800. Income above this threshold is not subject to Social Security tax. Therefore, higher-income earners pay Social Security tax on a smaller proportion of their total income than lower-income earners.

Review the federal personal income tax system

The federal personal income tax system is progressive, meaning that as an individual's income increases, they pay higher tax rates on the additional income. The tax brackets and rates vary each year, but generally, the income tax rate ranges from 10% to 37% on income after various deductions and exemptions.

Analyze option (a)

"Bill Gates pays more Social Security tax than most American workers." Given that there is a maximum taxable income for Social Security tax, high earners like Bill Gates face a cap on the total amount of Social Security tax they pay. Thus, while he likely pays more Social Security tax than some American workers, the difference is not as significant as it might otherwise be due to this cap.

Analyze option (b)

"The rich pay a higher proportion of their income in Social Security tax than in federal personal income tax." This statement is not true. As we've seen, Social Security tax has a maximum taxable income, meaning like the rich pay Social Security tax up to a limit, even if their overall income is much higher than the threshold. With the progressive federal income tax system, wealthier individuals pay a higher percentage of their income as they earn more, without a cap.

Analyze option (c)

"Most wage earners pay more in federal personal income tax than in Social Security tax." Since the Social Security tax rate is 6.2% for employees and capped at a maximum taxable income threshold, it's possible that many wage earners in higher tax brackets will end up paying more in federal personal income tax than in Social Security tax, especially since federal income tax rates can reach 37%.

Analyze option (d)

"The rich pay Social Security tax on nearly their entire income." This statement is not true because, as noted earlier, there is a maximum taxable income for Social Security tax. Any income earned above this threshold does not have Social Security tax applied to it.

Conclusion

From our analysis of the given options, option (c) – "Most wage earners pay more in federal personal income tax than in Social Security tax" – appears to be the true statement.

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