Whether examined from both tax systems and in economics, tax rates describe the burden ratio, which is typically stated as a percentage, at which a government, whether local, state, or federal, assesses taxes against an individual, entity, or business.
There are nearly as many different methods of determining a tax rate as there are taxes. Some of these kinds of tax rates are a statutory tax rate, an average tax rate, a marginal tax rate, an effective tax rate, an effective average tax rate, and an effective marginal tax rate. A tax rate can be applied to a tax base as an inclusive tax rate or exclusive tax rates.
Statutory tax rates are assessed by law. A statutory tax rate can vary based on income levels in the case of income taxes, or a flat statutory tax rate in the case of a sales tax.
When analyzing tax rates, a marginal tax rate is a tax rate that applies to an individual’s taxable income or spending. In contrast, the effective tax rate is used to account for the actual tax rate, the tax rates that are assessed after the government discounts and tax credits are applied against the statutory tax rates.
An effective marginal tax rate accounts for the fact that individuals can find themselves in an income range wherein an individual who finds themselves subject to phasing out of an exclusion or deduction.