Effective tax rate

The effective tax rate is the total tax paid divided by total income. It is also called the average tax rate. Unlike the statutory or marginal tax rate, it reflects the effect of brackets, deductions, exemptions and credits.

Because a progressive system taxes only the portion of income above each threshold, the effective rate rises more slowly than the marginal rate. A household in a 22 percent bracket might have an effective federal income tax rate far lower, such as around 10 percent, depending on income and deductions. Researchers also compute effective rates for combined federal, state and payroll taxes, and for corporations, whose rates differ from the statutory figure because of provisions that reduce taxable income. The definition of "income" used matters: some calculations include untaxed forms such as unrealized gains.

The measure is often used in comparisons of who pays what. Supporters of tax cuts and critics of high rates point to the share of taxes paid by high earners; others note that wealthy households can have lower effective rates because much of their income comes from capital gains taxed at lower rates, which they argue is a reason for reform. Differences between statutory and effective corporate rates are another topic of dispute, linked to tax expenditures.