What Is the Difference Between the Statutory and Effective Tax Rate?
Last Updated March 21, 2022
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.
The same concept applies to corporate taxes. The federal statutory corporate tax rate is currently set at 21.0 percent — reduced from 35.0 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 19.7 percent in 2021.
Photo by Zach Gibson/Stringer/Getty Images
Further Reading
The Next Fiscal Cliff: Big Tax Decisions to Make in 2025
Some TCJA provisions were made temporary to limit the negative fiscal impact of the 2017 bill. It sets up a significant decision point for policymakers next year.
How Do We Tax the Top 1% — And What That Means for the Federal Budget
The top 1 percent pay a significant share of all federal taxes, while also benefitting disproportionately from preferential tax treatment.
What is Stepped-Up Basis on Capital Gains and How Does it Affect the Federal Budget?
The step-up in basis is a provision in tax law that relates to how assets — such as stocks, bonds, or real estate — are valued and taxed after their owner passes away.