How to Calculate an Effective Tax Rate
The effective tax rate equals total tax paid divided by total income, times 100; it is the average rate across all income, not the rate on the last dollar.
The Effective Tax Rate formula
Calculator
Enter income and a bracket schedule to get total tax paid and the average rate that income actually faces.
Measured before any tax is taken out.
10% on the first slice of income in the illustrative schedule.
Income above this point moves into the second bracket.
Applies only to income inside the second bracket, not to all income.
Income above this point moves into the third bracket.
The top rate, charged only on income above the second bracket.
Total tax of $19,000 divided by income of $90,000. This is the share of all income that goes in tax.
- Total tax paid
- $19,000
- Marginal tax rate
- 30%
- Income after tax
- $71,000
- Tax structure
- Progressive
$2,000 from the first bracket, $8,000 from the second and $9,000 from the third.
The rate on the next dollar earned, which is the top bracket this income reaches. It is not the same as the average rate above.
What is left once every bracket has taken its slice.
The marginal rate sits above the average rate under a progressive schedule, and the two are equal under a flat tax.
How to calculate Effective Tax Rate, step by step
- 1Write down total income. Use the full income figure the question gives you, measured before any tax is taken out.
- 2Tax each bracket separately. Under a progressive schedule each rate applies only to the income inside its own bracket, so tax each slice on its own rather than applying the top rate to everything.
- 3Add the slices to get total tax. Sum the tax owed from every bracket. This total, not any single bracket rate, becomes the numerator.
- 4Divide and convert to a percent. Effective rate = (total tax ÷ total income) × 100. Under a progressive system the answer always sits below the top bracket rate.
Worked example: Effective Tax Rate
Take an illustrative schedule: 10% on the first $20,000, 20% on income from $20,000 to $60,000, and 30% on income above $60,000. A worker earns $90,000. Bracket one: 10% × $20,000 = $2,000. Bracket two: 20% × $40,000 = $8,000. Bracket three: 30% × $30,000 = $9,000. Total tax = 2,000 + 8,000 + 9,000 = $19,000. Effective tax rate = (19,000 ÷ 90,000) × 100 = 21.1%. Her marginal rate is 30%, well above the 21.1% she actually averages.
Effective Tax Rate questions
Is the effective tax rate the same as the marginal tax rate?
No. The effective rate is total tax divided by total income, while the marginal rate is the rate charged on the next dollar earned, which is the highest bracket the income reaches.
Why is the effective rate lower than the top bracket rate?
Because only the income sitting inside the top bracket is taxed at that rate, and every earlier slice is taxed at a lower rate. Those lower slices pull the average down.
What is the effective rate under a proportional tax?
Under a proportional (flat) tax the effective rate equals the single statutory rate at every income level, so the average and marginal rates are identical.
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