What is the effective tax rate?

The effective tax rate is the average rate of taxation of an individual's income or a corporation's pretax profit, according to Investopedia. It represents a taxpayer's tax liability more accurately than marginal tax rate and is usually applicable in progressive tax systems in which tax increases with the income level.

An individual calculates his effective income tax rate by dividing the sum of his tax expenses by his taxable income, as Investopedia explains. A corporation finds its effective tax rate, on the other hand, by dividing a summation of the tax expenses of the corporation by the corporation's pretax profit.