Glossary term
Effective tax rate
Effective tax rate is a broad tax-rate measure whose meaning depends on the tax amount and income base being compared.
Plain meaning
What effective tax rate means
Effective tax rate is often used to describe tax as a percentage of income, but the term is not always used consistently. The calculation is only clear when both the numerator and denominator are stated.
Formula role
How OpenBook uses it
OpenBook uses effective tax rate only where the calculator states the income base. In some contexts it may resemble average tax rate. In other contexts it may include taxes, credits, benefit reductions, or other cash-flow effects.
Common confusion
Not a substitute for marginal rate
An effective tax rate does not necessarily show the tax effect of earning or realizing one more dollar. That separate concept is the marginal tax rate.