EFFECTIVE RATE
Another name for annual percentage rate that refers to the amount of yearly interest to be charged by a lender on the money borrowed by a debtor.
In federal INCOME TAX law, the actual tax rate that an individual taxpayer pays based upon his or her taxable income.
Federal income tax laws increase the rate of
taxation as a taxpayer reaches certain marginal
income levels. For example, taxpayers might pay
a tax rate of 20 percent on the first $10,000 of
taxable income. Thereafter, any increase in
income up to an additional $5,000 might be tax-
able at a rate of 22 percent on that $5,000. The
effective rate of tax is computed by dividing the
total amount of tax paid by the total of the per-
son’s taxable income, adding the tax paid on the
person’s first $10,000 at a 20 percent rate to the
tax paid on the next $5,000 that is at a 22 percent
rate. The effective rate is not an average of the
tax rates imposed since the average does not take
into account the differences in the marginal
income levels. A taxpayer’s effective tax rate is,
however, more than the person’s bottom mar-
ginal rate but less than his or her top marginal
