Question

Jack earns $90,000 while Priscilla earns $130,000. A regressive social security tax of 5%, paid only up to $90,000, would mean that
(A) Priscilla pays more tax dollars than Jack.
(B) Both pay the same amount of dollars in the tax but Jack pays a lower tax rate.
(C) Both pay the same amount of dollars in the tax and pay the same tax rate.
(D) Both pay the same amount of dollars in the tax even though Jack pays in a higher tax rate bracket.
(E) Priscilla pays no taxes (income over $90,000) so the burden falls on Jack.

Answer 1

D) Both will pay the same amount of dollars in the tax even though Jack pays in a higher tax bracket.

Explanation:

With the regressive tax system, the higher you earn the lower the tax you are liable to pay.

Since Priscilla earns more that the cap of $90,000 she is liable to pay tax on only the $90,000 and the rest ($130,000-$90,000) $40,000 is exempted from tax.

Whiles Jack is liable to the same tax as Priscilla thought he earns lower than her.

Computations.

Jack: 5% x $90,000 = $4,500

Priscilla: 5% x $90,00 = $4,500

Amount to take home.

Jack: $90,000 - $4,500 = $85,500

Priscilla: $130,000 - $4,500= $125,500

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