Why is the social security tax (also known as the payroll tax) considered regressive?

• A. Because higher-income individuals pay a higher percentage of their income in social security taxes.
• B. Because the tax is only applied to investment income, not wages.
• C. Because everyone pays the same dollar amount regardless of income.
• D. Because the tax rate decreases as income increases above a certain threshold.

Answer: (D)

Verified step by step guidance

1. Understand the definition of a regressive tax: A regressive tax is one where the average tax rate decreases as the taxpayer's income increases.
2. Recognize that the Social Security tax applies only to income up to a certain wage base limit, meaning income above this threshold is not taxed for Social Security purposes.
3. Calculate the effective tax rate by dividing the total Social Security tax paid by the individual's total income, noting that for incomes above the wage base limit, the tax paid does not increase proportionally with income.
4. Observe that as income rises beyond the wage base limit, the Social Security tax paid remains constant, causing the average tax rate (tax paid divided by income) to fall.
5. Conclude that because the average tax rate decreases with higher income beyond the threshold, the Social Security tax is considered regressive.