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Effective vs Marginal Tax Rates

Guide to Understanding the Effective vs. Marginal Tax Rate Difference

Last Updated April 1, 2024

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Q: Can you please explain the difference between effective tax rate and marginal tax rate?

A: Marginal tax rate refers to the rate that is applied to the last dollar of a company’s taxable income, based on the statutory tax rate of the relevant jurisdiction, which is partly based on which tax bracket the company occupies (for US corporations, the federal corporate tax rate would be 21%).  The reason it’s called marginal tax rate is because as you move up in tax brackets, your “marginal” income is what is taxed at the next highest bracket.

Effective tax rate is the actual taxes due (based on the tax statements) divided by the company’s pre-tax reported income. Since there is difference btw pre-tax income on the financial statements, and taxable income on the tax return, thus the effective tax rate can differ from the marginal tax rate.

A good discussion of the reasons for the differences (and practical consequences for valuation) of  marginal vs effective tax rates can be found at:

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Matthew Rychel
April 14, 2023 1:18 pm

The 35% U.S. federal corporate tax rate is outdated.

Brad Barlow
April 16, 2023 9:12 pm
Reply to  Matthew Rychel

Hi, Matthew,

Thanks for pointing this out, indeed it is! It should say 21%.


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