GlossaryIntermediate
Effective Tax Rate
The actual average tax rate paid, calculated as total tax owed divided by total taxable income or gain -- distinct from a marginal or headline tax rate.
The effective tax rate divides the total tax actually owed by total taxable income or gain, producing the real average rate paid — a meaningfully different figure from a marginal tax rate (the rate applied to the next additional dollar of income) in any progressive tax system.
In a progressive tax system (see Kaavon's "Progressive Tax" glossary definition), a taxpayer's effective rate is generally lower than their top marginal rate, since only the income within the highest bracket is actually taxed at that top rate. See Kaavon's Effective Tax Rate calculator for the full calculation.
Examples
- A taxpayer's effective tax rate is generally lower than their top marginal rate in a progressive system, since only income within the top bracket is taxed at that rate.
- Effective tax rate is calculated from actual tax owed and actual income, not from any single bracket's stated rate.