Definition: The effective corporate tax rate measures the proportion of income tax a company pays compared to its earnings before tax. Unlike the marginal corporate tax rate, which is theoretical, the effective rate is based on actual taxes paid, providing a more accurate reflection of a company’s tax burden.

Calculating Effective Corporate Tax Rate: Step by Step

Example: Company Alpha

• Country: U.S.
• Earnings before tax (EBT): $1,500,000 • Income tax paid:$275,000
1. Determine Earnings Before Tax (EBT):
• EBT is what remains after deducting costs from revenue. In our example, Company Alpha’s EBT is $1,500,000. 2. Find Income Tax Paid: • This is the actual tax a company pays. In our example, Company Alpha’s income tax paid is$275,000.
3. Use the Formula:
• Effective Corporate Tax Rate = Income Tax Paid / EBT
• For Company Alpha: $275,000 /$1,500,000 = 18.33%

Difference Between Marginal and Effective Corporate Tax Rate

• Marginal Corporate Tax Rate:
• Applies to the last dollar of taxable income.
• Theoretical and based on statutory rates.
• Effective Corporate Tax Rate:
• Based on actual taxes paid.
• More accurate representation of a company’s tax burden.

FAQs

1. What is Earnings Before Tax (EBT)?
• Earnings after deducting costs, representing taxable income.
2. What is Marginal Corporate Tax Rate?
• The tax rate on the last dollar of taxable income.
3. What is Net Income?
• Earnings after deducting all expenses, indicating profitability.
4. Average Effective Corporate Tax Rate in the U.S. (2021):
• 25.8%, slightly higher than the global average of 23.8%.

For a quick and accurate calculation, use our Effective Corporate Tax Rate Calculator.