Average Tax Rate

Average tax rate came about as a term because, in America at least, we live under the progressive tax system regime. Under that structure, taxes get higher as individuals earn more money.

A model system might tax an individual $0 for the first $12,000 they earn. It might levy a 10% tax from $12,000 to $30,000 ($18,000 x 10% = $1,800). From $30,000 to $50,000, it might levy a 20% tax ($20,000 x 20% = $4,000), and from $50,000 to $100,000, it might levy a 35% tax ($50,000 x 35% = $17,500). That taxpayer who earned $100,000 that year will have a marginal tax rate of 35%, but they will have paid a total of $23,300 in taxes. So if they paid $23,300, then you'd say that their average tax rate on the $100,000 they earned was 23.3%.