Definition:
Average tax rate is the total amount of taxes paid divided by the taxpayer’s taxable income. It shows the overall percentage of income that is paid in taxes.
Formula:
Average Tax Rate = Total Taxes Paid / Taxable Income
Why is average tax rate important?
- Overall tax burden: It gives an overall picture of the tax burden on a taxpayer.
- Comparison: It can be used to compare the tax burdens of different individuals or businesses.
- Financial planning: Understanding average tax rate can help in financial planning and decision-making.
Note that average tax rate is different from marginal tax rate. Marginal tax rate is the tax rate applied to the last dollar of taxable income.
In essence, average tax rate is a useful metric for understanding the overall impact of taxes on a taxpayer’s income.
