Effective Tax Rate.
A definition, in plain English — with the books that teach it.
What it means
The effective tax rate is the average rate at which a person or company actually pays tax on total income, calculated by dividing total tax paid by total taxable income. It is always lower than the top marginal rate because progressive brackets mean lower income layers are taxed at lower rates. The effective rate is the most honest single-number summary of a taxpayer's overall burden and is used for year-over-year planning comparisons. It also clarifies how much benefit a deduction or credit actually provides relative to the marginal rate.
Example
A married couple has $200,000 in taxable income and pays $36,000 in federal income tax after deductions and credits. Effective rate = $36,000 / $200,000 = 18%. Although their top marginal bracket is 22%, the progressive structure means dollars in lower brackets are taxed at 10% and 12%, pulling the blended average down to 18%.
