November 15, 2017

What Is the Difference Between the Statutory and Effective Tax Rate?

The statutory tax rate is the percentage imposed by law; the effective tax rate is the percentage of income actually paid by an individual or a company after taking into account tax breaks (including loopholes, deductions, exemptions, credits, and preferential rates).

For example, an individual making $45,000 in 2017 would find him or herself in a bracket with a statutory tax rate of 25 percent. However, the average effective federal tax rate for someone with that income is 10.9 percent after taking into account the standard deduction, personal exemption, and other provisions for which they may be eligible.

The situation is similar with corporate taxes. The total statutory corporate tax rate, which includes the federal tax on corporate income (35 percent) as well as taxes imposed at the state and local levels, is 39 percent. However, the U.S. tax code has many preferences that affect the rate actually paid by corporations; taking those preferences into account, the average effective tax rate for corporations is 19 percent.

UPDATE (10/11/18): In December 2017, the Tax Cuts and Jobs Act was enacted, which implemented new individual and corporate income tax rates. An updated comparison of statutory corporate income tax rates across countries can be found here; data on the effective corporate tax rate is not yet available.

Related: Five things That We Have Learned Since The Tax Cuts Were Enacted

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