Advanced English Dialogue for Business – Effective tax rate

Listen to a Business English Dialogue About Effective tax rate

Sarah: Hi Benjamin, do you know what an “effective tax rate” means in finance?

Benjamin: Yes, I do. The effective tax rate is the average rate at which a taxpayer’s income is taxed, taking into account all deductions, credits, and exemptions.

Sarah: That’s right. How is the effective tax rate different from the marginal tax rate?

Benjamin: The marginal tax rate is the rate applied to the last dollar of income earned, while the effective tax rate reflects the overall tax burden after accounting for various tax provisions and adjustments.

Sarah: I see. Can you give an example of how someone’s effective tax rate might be calculated?

Benjamin: Sure, to calculate your effective tax rate, you would divide the total amount of taxes paid by your total taxable income, then multiply by 100 to get the percentage.

Sarah: Thanks for explaining, Benjamin. How can someone lower their effective tax rate?

Benjamin: One way to lower your effective tax rate is by taking advantage of tax deductions, credits, and retirement account contributions to reduce your taxable income.

Sarah: That makes sense. Are there any other factors that can affect someone’s effective tax rate?

Benjamin: Yes, factors such as changes in tax laws, income sources, and filing status can also impact someone’s effective tax rate, so it’s essential to stay informed and plan accordingly.

Sarah: I understand. Effective tax rates seem like an important consideration for individuals and businesses when managing their finances.

Benjamin: Absolutely, Sarah. Understanding your effective tax rate can help you make informed decisions about tax planning, investment strategies, and overall financial management.