Average Tax Rate Definition

Published Dec 23, 2022

Definition of Average Tax Rate

Average Tax Rate is defined as the total amount of taxes paid divided by the total taxable income. That means it is the average rate at which taxes are applied to a person’s income. It is usually expressed as a percentage.

Example

To illustrate this, let’s look at an imaginary person called John. John has a taxable income of USD 50,000.00 and pays USD 10,000.00 in taxes. That means his average tax rate is 20% (i.e., 10,000/50,000).

Why Average Tax Rate Matters

Average Tax Rate is an important concept for understanding the tax system. It shows how much of a person’s income is taken away in taxes. That means it is a useful tool for comparing the tax burden of different countries or different income levels. It also helps to identify potential areas for tax reform. For example, if the average tax rate is too high, it may be a sign that the tax system is too complex or that the tax brackets are too narrow.

Important Disclaimer: This definition was written by Quickbot, our artificial intelligence model trained to answer basic questions about economics. While the bot provides adequate and factually correct explanations in most cases, additional fact-checking is required. Use at your own risk.