Tax Rates

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The statutory tax rate structure, which is set by law, is one of the many features of the tax system that influence taxpayers’ behavior and that also contribute to the distribution of tax burdens across households. Other provisions in the tax code—including tax preferences and surtaxes—also affect taxpayers’ decisions and the distribution of taxes. CBO periodically analyzes two alternative measures of tax rates that are affected by many of those provisions: the average tax rate and the effective marginal tax rate.

The measure of average tax rates is similar for individuals and corporations. For individuals, CBO computes the average tax rate by dividing individual tax liability by before-tax income. For corporations, the average tax rate is calculated by dividing corporate tax liability by before-tax profits.

CBO’s measures of effective tax rates, however, vary by type of tax unit and form of income. The effective marginal tax rate for individuals is the percentage of an additional dollar of earnings that is unavailable because it is paid in taxes or offset by reduced benefits from government programs. For a corporation, the effective marginal tax rate is its tax burden on returns from a marginal investment (one that is expected to earn just enough, after taxes, to attract investors). Another measure—the effective marginal tax rate on capital income—is broader than the effective marginal corporate tax rate, because it also accounts for the taxes paid by individuals on interest, dividends, capital gains, and the profits of businesses not subject to the corporate income tax.