Q. Consider the following statements regarding the “Effective Tax Rate”:
1. It is applicable to both individuals and corporations.
2. The effective tax rate is a more accurate representation of a person’s or corporations overall tax liability than their marginal tax rate, and it is typically lower.
Which of the statements given above is/are correct?

[A] 1 only

[B] 2 only

[C] Both 1 and 2

[D] Neither 1 nor 2

Answer: C
Notes:

The effective tax rate is the average tax rate paid by an individual or a corporation.  

  • The effective tax rate for individuals is the average rate at which their earned income, such as wages, and unearned income, such as stock dividends, is taxed.  
  • The effective tax rate for a corporation is the average rate at which its pre-tax profits are taxed, while the statutory tax rate is the legal percentage established by law. 
  • The effective tax rate is a more accurate representation of a person’s or corporations overall tax liability than their marginal tax rate, and it is typically lower.  
  • When considering a marginal versus an effective tax rate, bear in mind that the marginal tax rate refers to the highest tax bracket into which their income falls. 

Source: Sriram’s IAS