equals the tax divided by taxable income. For example, if the tax is $20,000 on taxable income of $80,000, the effective tax rate of the business is 25% ($20,000/$80,000).

tax rate paid by a taxpayer. It is determined by dividing the tax paid by the taxable income in a particular year. For example, if a taxpayer with a taxable income of $100,000 owes $30,000 in a year, he has an effective tax rate of 30%. The effective tax rate is useful in tax planning, because it gives a taxpayer a realistic understanding of the amount of taxes he is paying after allowing for all deductions, credits, and other factors affecting tax liability.

rate at which the taxpayer would be taxed if his tax liability were taxed at a constant rate rather than progressively. This rate is computed by determining what percentage the taxpayer's tax liability is of the taxpayer's total taxable income.

1. the ad valorem tax payment compared with the market value of the property. Facilitates a comparison of taxes in different jurisdictions that apply different assessment ratios .
   Example: Community A applies a 50-mill rate to a 40% assessment ratio. The effective tax rate is 2% of the market value (50 mills = 5%; 5% × 40% = 2%).

2. one's annual income tax payments compared with annual income. Contrast with marginal tax bracket .
   Example: Morris paid $18,000 of income taxes last year on $90,000 of earnings. His effective tax rate is 20%.