Effective Tax Rate


What’s Taxed

  • Your Income
    • Individual Income Tax
    • Corporate Income Tax
    • Payroll Taxes
  • Your Property
    • Property Tax
    • Estate Tax
    • Wealth Tax
  • Your Spending
    • Sales Tax
    • Excise Tax (e.g. on tobacco, alcohol, and gasoline)
    • Tariffs
    • Value-added Tax

Effective Tax Rate

  • Effective Tax Rate = Taxes Paid / Income
  • A taxpayer’s effective tax rate for a period of time is the tax they paid during the period divided by the income they received during the period.
  • The Benefit and The Burden, Bruce Bartlett, page 32
    • “Generally speaking, economists are primarily concerned with the average or effective tax rate, which is simply taxes paid divided by income. That is the most meaningful measure of the burden of taxation.”
  • britannica.com/topic/taxation
    • “Average income tax rates indicate the fraction of total income that is paid in taxation. The pattern of average rates is the one that is relevant for appraising the distributional equity of taxation.”


  • A taxpayer made $100,000 last year
  • And paid
    • $10,000 in income tax
    • $5,000 in property tax
    • $5,000 in sales tax
  • Their total effective tax rate was 20%

Proportional, Progressive, and Regressive Taxes

  • A tax is proportional if everyone pays the same effective tax rate, no matter their income.
  • A tax is progressive if taxpayers with higher incomes pay higher effective tax rates.
    • Federal individual income taxes are progressive
  • A tax is regressive if taxpayers with lower incomes pay higher effective tax rates.
    • Sales taxes are regressive because they take a larger percentage of income from low-income taxpayers than from high-income taxpayers. (IRS)
    • A person making $25K a year pays a sales tax of $2,475 on a new car; his effective sales tax rate is 9.9%. But a person making $50K a year who buys the same car has an effective tax rate of 4.95%

Effective Federal Tax Rates by Income Quintile, 2018

  • Overall Federal Tax System is progressive
  • Federal Individual Income Tax is progressive
  • Corporate Income Tax is progressive
  • Federal Payroll Tax is fairly regressive
  • Federal Excise Tax is regressive

Other countries have less progressive tax systems,
but higher tax rates

  • The Benefit and The Burden, Bruce Bartlett, page 77
    • “Most European countries effectively have flat-rate tax systems, and this is one reason they can have both higher rates and less progressivity.
    • Another important distinction between U.S. and foreign tax systems is that other countries rely much more heavily on consumption taxes than the United States does. Since consumption taxes are far more efficient than income taxes—imposing less of an economic cost per $1 raised—the overall burden of taxes in other countries is lower than it appears if we look only at the tax/GDP ratio.
      • A tax is more efficient than another if it has lower overhead (in the form of administrative costs and deadweight cost).
    • Consumption taxes are also regressive, taking more in percentage terms from those with low incomes, whereas income taxes are progressive. This is another reason the U.S. tax system is more progressive and European tax systems are less progressive than commonly believed.”