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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.