Definition
The effective tax rate is total tax divided by total taxable income, representing the blended average rate across all brackets. It is always lower than the marginal rate in a progressive system. For corporations, the effective tax rate includes federal, state, and sometimes foreign taxes, and may differ significantly from the statutory rate due to deductions, credits, and deferrals.
functions Formula
Effective Tax Rate = Total Tax Paid / Total Taxable Income × 100%
lightbulb Example
Taxable income is $100K. Tax: 10% on $11,600 + 12% on $35,550 + 22% on $52,850 = $1,160 + $4,266 + $11,627 = $17,053. Effective rate = 17.05%, well below the 22% marginal rate.
verified_user Key Points
- Total tax / total income = average rate
- Always lower than marginal rate
- Corporate effective rate includes all jurisdictions
- Compare to statutory rate to assess tax efficiency