What does the average rate of tax (ART) measure?

The average rate of tax (ART) is a measure that provides insight into the proportion of income that an individual or entity pays in taxes relative to their total income. Specifically, it is calculated by dividing the total tax payable by the total income. This metric allows individuals and policymakers to understand the overall tax burden and how it scales with income levels, offering a clearer picture of tax equity and revenue generation as income changes.

For instance, if a person earns $100,000 and pays $20,000 in taxes, the ART would be 20%, indicating that on average, they give 20 cents of every dollar earned to taxes. This contrasts with other measures, such as the marginal tax rate, which focuses on the rate of tax applied to the last dollar earned, rather than providing a comprehensive view of total tax obligations against total earnings.

By understanding ART, one can analyze the effectiveness of tax policies and how they impact various income groups, contributing to discussions about fairness and efficiency within the tax system.