We need to see what the effective tax rate is and then compare.In the case of an individual, it can be calculated by taking a ratio of total tax expenses and taxable income and for corporations, it is calculated by dividing total income tax expense by the earnings before taxes.
We should always keep in mind that the effective tax rate is not the same as the statutory tax rate or the marginal tax rate. The statutory tax rate is the dollars amount of tax levied per 100 of taxable income. On the other hand, the marginal tax rate is the rate that is applicable to additional income earned. Which implies that the income is segregated into slabs and higher income slab will carry higher tax rate and vice versa. So all the income will not be taxed at the same rate and we can see what the effective tax rate is by dividing the total tax with total taxable income. Lets take an example of Tax calculation in the US for individuals. His annual income is 100,000 and he put some of his income in tax savings financial instruments. The incremental tax rate (15 on 28,625 and 25 on 42,050) is basically the marginal tax rate. So we can see that the effective tax rate is lower than the marginal tax rate but higher than the lowest bracket income tax. So individuals and companies will pay different tax for a different level of income. Effective tax rate helps us in comparing companies and taxpayers. Because of which, every company has a different effective tax rate which it pays. For example, companies who are not doing well and had experienced financial losses in the past, they can use their losses to decrease their taxable income. Also, for research and development costs, there are tax breaks from the government which can affect not only net income but applicable income tax rates. Similarly, corporations with operations in different countries, they may strategically choose to expand operations in those countries where the tax rates are most favorable. So in a way, they will reduce their tax amount which otherwise they have to pay if they have not chosen that country. This value can change in any direction and sometimes the changes are very drastic. But it cannot be interpreted immediately why it has happened. Sometimes this happens due to operational efficiencies or limitations. But sometimes companies can indulge in activities like asset manipulation so that they can reduce their tax burden. For example, Let say there are 2 companies A B who are in the same bracket of a marginal tax rate of 25. But this will not give us a clear picture of the tax exposure of these businesses.
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