What is the effective tax rate?


Quick Answer

The effective tax rate is the average rate of taxation of an individual's income or a corporation's pretax profit, according to Investopedia. It represents a taxpayer's tax liability more accurately than marginal tax rate and is usually applicable in progressive tax systems in which tax increases with the income level.

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Full Answer

An individual calculates his effective income tax rate by dividing the sum of his tax expenses by his taxable income, as Investopedia explains. A corporation finds its effective tax rate, on the other hand, by dividing a summation of the tax expenses of the corporation by the corporation's pretax profit.

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