Average Tax Rate

The average tax rate is calculated by dividing the total amount of taxes paid by total income. Under 2006 U.S. law, for example, the rate on taxable income up to $7,500 is 10 percent, and the rate on taxable income between $7,500 and $30,650 is 15 percent. A person with $20,000 in taxable income would thus pay 10 percent on the first $7,500 of income (or $755) and 15 percent on the remaining $12,500 (or $1,875), for a total of $2,650 paid. Dividing the total taxes by the total income, one gets an average tax rate of 13.25 percent.

An average tax rate will usually be lower than a marginal tax rate, or the rate of tax paid on the last dollar earned. For those with extremely high incomes, average and marginal tax rates will be close to equal.