Effective tax rate also known as marginal tax rate is the average rate you pay on all your taxable income.

The effective tax rate simplifies comparisons among companies and taxpayers.

**Formula to calculate effective tax rate.**

**Example:**

Suppose the income tax expense of a firm is $ 20,000 and its earnings before tax is $ 300,000. Calculate the effective tax rate.

Therefore, the firm’s effective tax rate is 8.3%.