Question

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

Short answer

The social security tax is a combination of proportional (for incomes below \( \$113,000 \)) and regressive (for incomes above \( \$113,000 \)), as the tax rate remains constant at 6.2% for incomes below \( \$113,000 \) and effectively decreases for incomes above \( \$113,000 \). It is not a progressive tax since the tax rate does not increase with income.

Step-by-step solution

Defining Tax Types

Let's first define the three types of taxes we are examining: 1. Progressive tax: The tax rate increases as the income level increases. 2. Regressive tax: The tax rate decreases as the income level increases. 3. Proportional tax: The tax rate remains constant regardless of the income level.

Calculate Tax for Different Incomes

Now, let's calculate the tax amount for different income levels using the given 6.2% tax rate: 1. For an income of \( \$50,000 \): \[ \textrm{Tax} = 0.062 \times \$50,000 = \$3,100 \] 2. For an income of \( \$100,000 \): \[ \textrm{Tax} = 0.062 \times \$100,000 = \$6,200 \] 3. For an income of \( \$200,000 \): Since the tax is only applied to the income earned below \( \$113,000 \), the tax amount would be: \[ \textrm{Tax} = 0.062 \times \$113,000 = \$7,006 \] Notice that the income of \( \$200,000 \) is taxed at a lower rate than the others because only a portion of that income is taxable, and if we were to calculate the proportion of tax paid, we would notice that the tax rate does not follow a progressive, regressive, or proportional pattern.

Determine Tax Type

Now, we'll analyze whether the tax rate increases, decreases, or remains constant as the income increases. If it matches one of our tax definitions above, we will classify the social security tax accordingly. 1. For incomes below \( \$113,000 \): the tax rate remains constant at 6.2%. 2. For incomes above \( \$113,000 \): the tax rate effectively decreases as the income increases, as the tax does not apply beyond \( \$113,000 \). Given the above observations, we can classify the social security tax as a combination of proportional (for incomes below \( \$113,000 \)) and regressive (for incomes above \( \$113,000 \)). However, it is not considered a progressive tax since the tax rate does not increase as the income level increases.