Your Tax Rate Is Tricking You

If the merest glance at your tax rate prompts grim visions of a massive bill from the IRS, take heart. The often-overlooked difference between marginal and effective tax rates means you could pay less than you fear.

That's one effective margin!
Suppose you've sold your shares in Mr. Cluck's Chicken (Ticker: HRLEY), only to realize that the tidy gain you pocketed will kick you from your current 28% tax bracket into the lofty realm of 33%. Egad! Now your entire income will suffer a bigger bite from the IRS!

Not so fast. Only the amount of your income above the limit for the 28% tax bracket will get taxed at 33%. The next chunk down will get taxed at 28%, then at 25%, and so on, as you work backward past the various income thresholds. The highest rate, the bracket you claim, is your "marginal" rate -- the rate at which your last dollar (and your next) is taxed. But if you take your entire tax bill, and divide it by your total taxable income, you'll get your "effective" tax rate, which is usually far lower.

Marginal and effective corporations
This principle works the same with corporations. Thanks to various credits, loopholes, and such, many companies pay far less than the seemingly steep 35% corporate tax rate about which they occasionally complain. According to the Center for Public Integrity, the 275 biggest companies in America pay, on average, about 17%. That's less than the rate for many individual taxpayers.

And many companies pay much less than that. According to the Government Accountability Office, roughly a quarter of all large U.S. corporations pay no taxes at all in any given year!

If you're starting to get irate about this seemingly sweet deal for big businesses, calm down. Many companies do pay a hefty sum in taxes, as a glance at their income statements will usually reveal. Here's what the IRS collected in the past 12 months from a few familiar names:

Data: Yahoo! Finance. Figures are for past 12-month period.

As you can see, these companies pay a fairly wide range of effective tax rates. Just remember that from year to year, a company may have special circumstances and tax breaks that alter these numbers. Some companies also enjoy lower effective rates, thanks to earnings generated outside the U.S. and other factors.

The sums collected may look like a lot, but corporations generate less than a quarter of total taxes collected by the IRS. That leaves our income and payroll taxes to pick up the slack for the government's needs.

Are effective tax rates still a bit too effective for your liking? Should the government make corporations shoulder more of the burden? Let us know what you think via the comment box below.