Value Driver - Tax
- 01:58
Taxes - Marginal and Effective Tax Rates
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The marginal tax rate and effective tax rate are very different creatures, let's explore why A marginal tax rate is the rate paid on the next dollar of profit before tax It doesn't have to be dollar, could be pound, yen or euro So if I earned one more dollar, I would pay the marginal tax rate on that one dollar So where do we get this marginal tax rate from? Well it's the statutory tax rate in that country If we were looking at the U.S, this would be the federal tax rate but you would also have to add on the state tax rate in the U.S Okay, how does that compare to the effective tax rate? Well the effective tax rate is the average tax rate actually expensed in the income statements Why would that be different to the marginal tax rates? Well imagine a U.S company but it's got some operations in Ireland The U.S operations would be taxed at the U.S tax rate (which is quite high) But the Irish operations could be taxed at the Irish tax rate (which is quite low) Because you've got a mix of high tax rate and low tax rate, your average tax rate will be somewhere in between And it will certainly be lower than the U.S marginal tax rate. The company is based in the U.S, it has a U.S marginal tax rate So to calculate it, you take the tax expense of the company (on it's income statement) divided by the profit before tax (on the income statement) And as mentioned here it says, "often lower than the marginal tax rate". Again go back to the U.S company with the Irish operations The Irish tax rate very low and the U.S tax rate very high, the average of the two is going to be a lower figure than the U.S marginal tax rate