What is Effective Tax Rate ?
According to Untied State of America Income Tax Rate there is various tax slab rate on income earned during the relevant year from 1 January to 31 Decembers of every year. Effective Tax Rate is a average tax rate which ultimately paid to Government by a taxpayers. Efective tax rate for individuals is the average rate at which need to pay tax to a taxpayer on his total income earned during the financial year. The effective rate for a corporate tax payer is also the average rate at which its pre tax profit are taxed
Formula for effective tax rate calculation is
For individual = Total tax paid/ total income earned during the relevant financial year.
For Coporatation + Total Tax paid/ Total income earned before tax during the relevant financial year.
Imagine if a graduated tax system where income tax rate 10% upto $1,20,000, 15% on income between $ 120001 to $3,20,000 and over and above $ 3,20,000 at the rate 25%. Now consider two individuals Mr A & Mr.B who both hit the upper tax rate of 25% although Mr.A had a taxable income of $6,00,000 and the Mr. B had a taxable income of $ 4,00,000
Both individual would pay on their fi 10% on their first $ 1,20,000 of income, tax $12,000 and second slab 15% both would pay their income between $ 1,20,001 to $ 3,20,000 tax $ 30,000. Finally both would pay at the rate 25%on their earnings over and above the income $3,20,000. The individual with income $ 6,00,000
|Computation of effective tax rate|
|Particulars||Tax rate||Mr. A||Mr. B|
|Total taxable Income during the financial year||600,000||400000|
|First $ 1,20,000||10%||12000||12000|
|Second from $1,20,001 to $3,20,000 up to||15%||30000||30000|
|Third Over and above $ 3,20,000||25%||70000||20000|
|Total tax Payable||112000||62000|
|Taxpaid/ total taxable income||11200/600000||62000/400000|
|Effective tax rate in percentage||18.67||15.5|
Internal Revenue Services is a tax collection and operation in United State of America.
You can visit on Official website of IRS