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Effective tax rate: What is it and when is it used?

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What is the effective tax rate? When is this used?

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Solution Summary

The cited solution first compares the US progressive tax schedule to the effective rate. With a real world example, the tax is calculated and then compared to the marginal and effective rates. There are 3 paragraphs discussing the uses of the effective rate calculation.

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In our system of taxation, the US has a progressive rate structure which assesses different percentage rates of tax for different income levels. For example, in 2011, a single taxpayer would pay tax as follows:

For income of $0 - $8500, the rate is 10%,
For income of $8500 to $34500, the rate of 15%,
For income of $34500 to $83600, the rate is 25%,
And followed by three higher levels of tax.
See page 6 of http://www.irs.gov/pub/irs-pdf/f1040es.pdf

The effective rate is a simple average calculation used to express the total tax percentage rather than stating the progressive rate. The calculation of effective rates also includes other ...

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