Plain meaning
The total tax paid as a percentage of total income or taxable income, depending on the context being measured.
Also called
effective tax rate
Key points
- Average tax rate is calculated by dividing tax by the chosen income measure.
- It differs from the marginal tax rate, which applies to the next dollar of income.
- Different reports may use different denominators, such as total income, taxable income, or adjusted income.
- Average-rate comparisons should be read carefully because credits, deductions, and benefits can affect the result.
Why it comes up
Average tax rate appears in fairness debates, tax-burden comparisons, and explanations of how progressive tax systems work.