The Social Security tax is considered regressive because:

• A. It takes a larger percentage of income from low-income earners than from high-income earners.
• B. It increases as income rises above the taxable maximum.
• C. It exempts all wage earners below a certain income threshold.
• D. It is only applied to investment income.

Answer: (A)

Verified step by step guidance

1. Understand the definition of a regressive tax: A regressive tax is one where the tax rate decreases as the taxpayer's income increases, meaning lower-income earners pay a higher percentage of their income compared to higher-income earners.
2. Analyze how the Social Security tax is applied: It is levied on wages up to a certain maximum taxable income limit, beyond which no additional Social Security tax is charged.
3. Recognize that because of this cap, high-income earners pay Social Security tax only on income up to the limit, while low-income earners pay the tax on all their wages, resulting in a higher effective tax rate for lower-income earners.
4. Compare the options given: The correct explanation aligns with the idea that the tax takes a larger percentage of income from low-income earners than from high-income earners due to the taxable maximum.
5. Conclude that the regressive nature of the Social Security tax stems from the cap on taxable income, which limits the tax burden on higher earners and makes the tax rate effectively higher for lower earners.