The person on the receiving end of the quip is being accused of acting like they were retarded, when they in fact aren't. The term is not used disparagingly of the mentally handicapped, only comparatively.
"retarded" is disparaging, not descriptive. IIRC, the term "mentally retarded" (origin of retard/retarded/retardo) was originally intended to apply to certain learning disabilities. It became regarded as disparaging because the term wasn't actually descriptive of this, and was replaced by the more descriptive "developmentally disabled". Neither term is equivalent to "mentally handicapped".
Is there a difference between the vulgar and the offensive
I think part of being vulgar is being offensive in some contexts.

In reply to Re: Re: Let's discuss Podmaster's Signature by ysth
in thread Let's discuss Podmaster's Signature by princepawn

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