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Chapter 17: Problem 7

The social security tax is \(6.2 \%\) on employees' income earned below 113,000 dollar. Is this tax progressive, regressive or proportional?

Short Answer

Expert verified
The social security tax is regressive, as the tax rate decreases for those with higher incomes above the maximum cap of $113,000. While employees with incomes below this cap have an effective tax rate of \( 6.2\% \), those with higher incomes experience a lower effective tax rate.

Step by step solution

01

Calculate Social Security Tax for Different Income Levels

Since the social security tax is a percentage of the employee's income, we will calculate the amount of social security tax for different income levels, keeping in mind that the tax only applies to income earned below $113,000. Let's take three income scenarios: 1. Employee A: Earning $50,000 per year 2. Employee B: Earning $113,000 per year (maximum cap) 3. Employee C: Earning $150,000 per year Now, we will calculate the tax for each employee: 1. Employee A: \( 6.2\% \) of \(50,000 = \)3,100 2. Employee B: \( 6.2\% \) of \(113,000 = \)7,006 3. Employee C: \( 6.2\% \) of \(113,000 = \)7,006 (since the maximum cap is $113,000)
02

Analyze the Tax Rates for Each Income Scenario

Now, let's compare the effective tax rate for each employee: 1. Employee A: \(\frac{$3,100}{\50,000}\) = \( 6.2\% \) 2. Employee B: \(\frac{$7,006}{\113,000}\) = \( 6.2\% \) 3. Employee C: \(\frac{$7,006}{\150,000}\) = \( 4.67\% \)
03

Determine if the Tax is Progressive, Regressive, or Proportional

Based on the above analysis, we can see that: - Employee A and B both have an effective tax rate of \( 6.2\% \), which is the same regardless of the difference in their incomes. - However, Employee C has an effective tax rate lower than that of Employees A and B, at only \( 4.67\% \). Thus, the social security tax appears to be regressive, as the tax rate decreases for those with higher incomes above the maximum cap.

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