Effective tax rate

The effective tax rate is the actual percentage of a company's pre-tax income that it pays in income taxes, calculated as income tax expense divided by income before taxes. It reflects everything that actually affects the tax bill in practice.

A company's effective tax rate often does not match its statutory corporate tax rate, the rate set by law, because of factors like tax credits, deductions, and income earned in lower-tax jurisdictions. A falling effective tax rate can flatter net income growth even when operating performance has not meaningfully improved, which is worth checking separately.