Question

Under the formula for taxing Social Security benefits, low-income taxpayers are not required to include any of the Social Security benefits in gross income. But as income increases, 50% of the Social Security benefits may be included in gross income. Further increases in income will cause as much as 85% of the Social Security benefits being subject to tax. Does this mean that the taxation of Social Security benefits is more or less progressive than the taxation of other types of income?

Answer 1

Progressive Taxes

Taxes assessed under a progressive system are based on the taxable amount of an individual's income. These taxes follow an accelerating schedule, which means that high-income earners pay more than low-income earners. Tax rate, along with tax liability, increases as an individual's wealth increases. The overall outcome is that higher earners pay a higher percentage of taxes and more money in taxes than do lower-income earners.

This sort of system is meant to affect higher-income people more than low- or middle-class earners to reflect the presumption that they can afford to pay more.

The US taxation is progressive as the rate of marginal tax is higher for higher income. Also a standard deduction is allowed by US Federal Taxation System so that some of the first income is not subject to taxation. It also employs many other methods to ensure a progressive taxation system.

Taxation of Social Security benefits

The Social Security benefit formula itself impacts the implicit taxes on work. The formula is progressive, so those with high earnings get much less in additional benefits per dollar of payroll tax than those with lower incomes

The taxation of Social Security Benefits is more progressive than other incomes.

It is so because in normal income, slab wise rates increase with the increase in income.

However, in case of Social security benefits, the taxation and amount and percentage of social security benefits that will be taxed, depends on the Adjusted Income (MAGI) and increased with the increase of Adjusted income.

Hence, it is doubly progressive by following two steps instead of normal one step of increase in rate with slab based on increase in income.

First Step:- Only if Adjusted income exceeds a certain threshold, the benefits will be taxed. Percentage of benefits to be taxed increases with increase in Adjusted Income. (Progressive Taxation.)

Second Step:- Normal and applies for all incomes, higher tax rate due to increase in income levels, marginal tax rates for the increased higher incomes is higher.

Hence, in conclusion we can say that the taxation of Social Security benefits is more progressive than the taxation of other types of income.