The statutory tax rate is the legally imposed tax rate on income, as set by law. It's the official rate before any deductions, exemptions, or credits are applied.
The effective tax rate is the actual rate of tax paid by an individual or a company on their taxable income, after taking into account all deductions, exemptions, and credits. It is calculated by dividing the total tax paid by the taxable income.
Key Differences:
- Statutory Tax Rate:
- The published, official tax rate.
- Does not account for any tax breaks or special provisions.
- Often higher than the effective tax rate.
- Effective Tax Rate:
- The actual tax burden.
- Reflects the impact of all deductions, credits, and exemptions.
- Calculated as (Total Tax Paid / Taxable Income) * 100.
- Typically lower than the statutory tax rate due to various tax benefits.