average tax rate

(noun)

The ratio of the amount of taxes paid to the tax base (taxable income or spending).

Related Terms

Examples of average tax rate in the following topics:

  • Comparing Marginal and Average Tax Rates

    • An average tax rate is the ratio of the total amount of taxes paid, T, to the total tax base, P, (taxable income or spending), expressed as a percentage.
    • If a company pays different rates on the first $100,000 in earning than the next $100,000, it will sum up the total tax paid and divide it by $200,000 to calculate the average tax rate.
    • The term "progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate.
    • A regressive tax is a tax imposed in such a manner that the average tax rate decreases as the amount subject to taxation increases .
    • "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the marginal tax rate.

  • Tax Rate

    • A statutory tax rate is the legally imposed rate.
    • An average tax rate is the ratio of the amount of taxes paid to the tax base (taxable income or spending).
    • To calculate the average tax rate on an income tax, divide the total tax liability by the taxable income.
    • In such cases, the average tax rate will be lower than the marginal tax rate.
    • For instance, an individual may have a marginal tax rate of 45%, but pay an average tax of half this amount.

  • Corporate and Payroll Taxes

    • Many countries impose a corporate tax, also called corporation tax or company tax, on the income or capital of some types of legal entities.
    • The taxes may also be referred to as income tax or capital tax.
    • The rate of tax varies by jurisdiction; however, most companies provide or make public the effective tax rate on the income earned.
    • The effective tax rate is the average corporate tax rate on the company's income and this takes into consideration tax benefits included in a current tax year.
    • Corporations are also subject to a variety of other taxes including: property tax, payroll tax, excise tax, customs tax and value-added tax along with other common taxes, generally in the same manner as other taxpayers.

  • Tax Loopholes and Lowered Taxes

    • Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law.
    • The term tax mitigation's original use was by tax advisors as an alternative to the pejorative term tax avoidance.
    • Both tax avoidance and evasion can be viewed as forms of tax noncompliance, as they describe a range of activities that are unfavorable to a state's tax system.
    • Also, in 1998 alone, a total of 94 corporations faced a net liability of less than half the full 35% corporate tax rate and the corporations Lyondell Chemical, Texaco, Chevron, CSX, Tosco, PepsiCo, Owens & Minor, Pfizer, JP Morgan Saks, Goodyear, Ryder, Enron, Colgate-Palmolive, Worldcom, Eaton, Weyerhaeuser, General Motors, El Paso Energy, Westpoint Stevens, MedPartners, Phillips Petroleum, McKesson, and Northrup Grumman all had net negative tax liabilities.
    • A review in 2011 by Citizens for Tax Justice and the Institute on Taxation and Economic Policy of companies in the Fortune 500 profitable every year from 2008 through 2010 stated these companies paid an average tax rate of 18.5%, and that 30 of these companies actually had a negative income tax due.

  • The Cost of Debt

    • The cost of debt is a component of the weighted average cost of capital (WACC) and is composed of the rate of interest paid.
    • The risk free rate is 5% and the corporate tax rate is 20%.
    • Since in most cases debt expense is tax deductible, the cost of debt is computed as an after-tax cost to make it comparable with the cost of equity.
    • Thus, for profitable firms, debt is discounted by the tax rate .
    • Cost of debt equals the interest rate of the debt (composed of the risk-free rate and a credit risk premium) times one, minus the corporate tax rate.

  • Taxes

    • Understandable: A tax system should be easily understandable by the average citizen who has to pay the tax.
    • Proportional Tax: Otherwise known as a flat tax, a flat tax rate is applied to all earned income regardless of how much the taxpayer earns.
    • So a person making $20,000 would pay the same rate as a person making $120,000, but would pay significantly less in real dollars.
    • Progressive Tax: The more a person earns, the higher the tax rate.
    • Regressive Tax:In a regressive tax system, poorer families pay a higher tax rate.

  • Weighted Average Cost of Capital

    • The weighted average cost of capital (WACC) is the rate a company is expected to pay, on average, to its security holders.
    • The WACC is also the benchmark rate, or the minimum rate of return, a company must earn on a new venture in order to make the investment worthwhile.
    • Stated differently, the return on capital of a new project must be greater than the weighted average cost of capital.
    • In order to calculate WACC, a few inputs must be known, namely, the cost of debt, the cost of equity, and the company's marginal tax rate.
    • T is the company's marginal tax rate.

  • Individual Taxes

    • State income tax rates vary from 1% to 16%, including local income tax where applicable.
    • Sales tax is calculated as the purchase price times the appropriate tax rate.
    • Tax rates vary widely by jurisdiction from less than 1% to over 10%.
    • These taxes are computed as the taxable amount times a graduated tax rate (up to 35%).
    • This graph shows the effective sales tax rates for the 50 states.

  • Trading off Equity and Efficiency

    • Income taxes are a laddered progressive tax where income tax rates are set in income bands or ranges.
    • Each tax rate corresponds to a particular income range; income above a tax range is subject to a higher tax rate that corresponds to a higher income range and income below a specific range is subject to a lower tax rate, similarly identified with a lower income range.
    • Within any given income range, the tax rate is the same.
    • At the highest income tax rate, income taxes can become regressive, since high earners are only subject to a constant albeit highest rate on their income.
    • Income tax is a progressive tax that assumes a regressive nature at the highest tax rate.

  • The Federal Tax System

    • Federal tax rates vary from 10% to 35% of taxable income.
    • State and local tax rates vary widely by jurisdiction, from 0% to 12.696% and many are graduated.
    • These include Social Security and Medicare taxes imposed on both employers and employees, at a combined rate of 15.3% (13.3% for 2011).
    • Property tax rules and rates vary widely.
    • Sales tax rates vary widely among jurisdictions, from 0% to 16%, and may vary within a jurisdiction based on the particular goods or services taxed.