What is Tax Rate?
The actual percentage of pre-tax income paid in taxes, reflecting all deductions, credits, and tax strategies.
Think of it like this
Like knowing what percentage of your salary actually goes to taxes after all deductions - not the bracket rate, but what you really pay.
Formula
Effective Tax Rate = Income Tax Expense ÷ Pre-Tax Income × 100- Income Tax Expense: Total taxes paid or owed
- Pre-Tax Income: Earnings before income taxes
Why it matters
- Affects actual earnings available to shareholders
- Lower rate can boost earnings
- Tax strategies affect competitiveness
- Changes in tax law directly impact profits
What's a good value?
< 15%
Very Low
Strong tax planning or special credits
15-21%
Low
Efficient tax management
21-28%
Moderate
Near US statutory rate
> 28%
High
Limited tax advantages
Real-world example
Tech companies with foreign IP often have 15-18% rates vs. 25%+ for domestic firms.
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