Average Tax Rate: Meaning, Formula & Example

The average tax rate is the total tax paid divided by taxable income. While marginal tax rates show how much tax is paid on the next dollar earned, average tax rates show the overall share of income paid in taxes.

How Are Average Tax Rates Calculated?

For individual income, the average tax rate is total taxes paid ÷ income. A single taxpayer with $45,000 in gross income pays approximately $3,700 in income taxes, resulting in an average rate of 8.2%. This tax liability comes from the tax bracket the individual falls into and the marginal rates applied across portions of their income:

• Part is taxed at a marginal rate of 10%,

• Part is taxed at a marginal rate of 12%,

• And part is untaxed due to the standard deduction.

Progressivity and Who Pays

Because the U.S. federal tax system is progressive, higher-income taxpayers face higher average income tax rates.
According to 2020 IRS data:

• The top 1% had an average tax rate of 26.0%,

• While the bottom 50% of taxpayers had an average tax rate of just 3.1%.

How Have These Rates Changed Over Time?

Average tax rates for the top 0.1% of U.S. households have fluctuated over time, reflecting changes in federal, state, and local tax laws.

• Average tax rates on total taxes for the top 0.1% fell 10.8 percentage points from the 1950s (the blue line in the figure below).

• Average income tax rates have remained relatively stable (the purple line):

  • In the 1950s: 21.0%

  • As of 2014: 20.7%

Clarification on High Statutory Marginal Rates

The 91% top marginal income tax rate in 1950 only applied to households with income over $200,000 (about $2 million in today’s dollars).

• Fewer than 10,000 households had enough income to fall into that top bracket.

• Even among those households, most of their income was not subject to the 91% rate, since it applied only to income above $200,000, not to every dollar earned.

• So despite a very high top bracket, the average tax rate was much lower.