(1) If you’re employed by someone else, how much would you pay in SS tax for the
ID: 2496206 • Letter: #
Question
(1) If you’re employed by someone else, how much would you pay in SS tax for the earnings below? How much in Social Security taxes would you pay and would your employer pay on an extra $1 in earnings, given the earnings below? (Note: I want the tax on that marginal dollar, so the answer is less than $1)
(a) Your annual earnings are $20,000?
(b) Your annual earnings are $50,000?
(c) Your annual earnings are $150,000?
(2) Is the Social Security tax progressive, flat, or regressive?
(3) Suppose you earn an hourly wage of w and that you are self-employed (thus, you pay both the employee and employer parts of the Social Security payroll tax). Ignore all other taxes. Suppose also that if you worked your full time endowment T, you would gross over $150,000. Draw the budget constraint that limits your choice of leisure and take-home income, putting leisure hours on the horizontal axis and dollars on the vertical axis. Label all slopes and coordinates of any kink points
Explanation / Answer
1.
Social security tax rates: OASDI + Medicare
For the year 2016, OASDI rate is 6.2% on the first $118,500 and Medicare rate is 1.45% on all earnings.
Social security tax paid by employee:
a. Social security tax = ($20,000 × 6.2%) + ($20,000 × 1.45%) = $1,530
b. Social security tax = ($50,000 × 6.2%) + ($50,000 × 1.45%) = $3,825
c. Social security tax = ($118,500 × 6.2%) + ($150,000 × 1.45%)
= $7,347 + $2,175
= $9,522
Social security taxes on marginal dollar ($1) for both employer and employee:
a. Social security tax = ($1 × 6.2%) + ($1 × 1.45%) = $0.0765
b. Social security tax = ($1 × 6.2%) + ($1 × 1.45%) = $0.0765
c. Social security tax = ($0 × 6.2%) + ($1 × 1.45%)
= $0 + $0.0145
= $0.0145
2.
Social security tax is flat, since there is fixed percentages, 6.2% and 1.45%
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