July 16, 2020

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

If your tax rate is 20%, does that mean you will pay 20 cents in taxes for every dollar you earn? It’s not quite that simple, so let’s look at the difference between statutory and effective tax rates.

The statutory tax rate is the rate imposed by law on taxable income that falls within a given tax bracket. 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 $40,000 in 2019 would find him or herself in a bracket with a maximum statutory tax rate of 22 percent. However, the average effective tax rate for someone with that income is 7.9 percent after taking into account marginal tax rates, the standard deduction and other provisions for which they may be eligible.

How do marginal tax rates work?

The same concept applies to corporate taxes. The federal statutory corporate tax rate is currently set at 21 percent — reduced from 35 percent by the 2017 Tax Cuts and Jobs Act (TCJA). 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 was 19 percent prior to the enactment of TCJA. More recent data on the effective corporate tax rate is not yet available — but it is safe to assume that the effective rate for corporations remains lower than the statutory rate.

The federal statutory corporate tax rate in the United States is in line with many other OECD countries

Related: Two Years Later, What Are Economists Saying about the Tax Cuts and Jobs Act?

Image credit: Photo by Zach Gibson / Stringer /Getty Images

What Does the Debt Mean for Our Future?

We all have a responsibility to build a brighter fiscal and economic future for the next generation.

National Debt Clock

See the latest numbers and learn more about the causes of our high and rising debt.