Statutory Tax Rate

The statutory tax rate refers to that rate imposed on an individual's taxable income falling under a predefined government tax bracket within a tax area. It serves as benchmark rates formulated by the government to tax corporations and individuals while acting as comparison standards for corporation tax rates.

It aids in generating revenue for government programs for essential activities like healthcare, education, and infrastructure. Moreover, it helps to promote economic activity, like incentivizing green energy or encouraging investments in a region. Progressive taxes having tiered statutory rates try to ensure just contribution per income level.

• A statutory tax rate is a rate applied to taxable income that falls inside a predetermined government tax bracket within a tax region.
• It functions as the government's benchmark rate for taxing people and corporations, providing a baseline by which corporation tax rates are measured.
• Hence, it is a government-set legal percentage contrasting with the effective tax rate, representing the actual percentage paid on total income by individuals and corporations.
• It signifies the percentage in specific tax brackets as per law, while the marginal tax rate reflects the tax paid on each additional dollar, influencing economic incentives.

A statutory tax rate is defined as the maximum official tax percentage set up by law applicable to taxable income. This is based on a particular tax bracket and income group for individuals and corporations. The tax bracket is the highest tax rate for which a corporation or an individual qualifies.

It is needed to provide constrained information on the fairness and simplicity of the tax system. Every taxpayer has to pay lesser average tax rates below it. Moreover, statutory rates help in determining effective marginal tax rates. Besides, it cannot be accurately said that statutory taxes never reflect the overall tax burden or precise metric of taxes paid for higher income. However, these rates have often been raised in tax reform discussions. Statutory rates provide little information regarding economic subsidies formed by the tax code. The United States corporate statutory tax rate is 21%; however, these changes are as per the laws and implications.

Under the US statutory tax rate or federal statutory tax rate framework, statutory rates have been made to follow a progressive system. Hence, this means lower taxes for low-income and higher taxes for higher income. It also means that income falling under each tax bracket faces the rate prevalent in that tax bracket only. Hence, almost all tax returns filed get in the lower tax slabs. 

Furthermore, most of the taxpayers experience the vast difference between their average tax rates and marginal tax rates. Consequently, taxpayers within higher tax slabs face an effective marginal rate, which is quite higher than their statutory rate. So, there is a smaller difference between statutory rates and effective marginal rates. It happens because of numerous provisions like phase-outs, phase-ins, and floors.  

Let us use a couple of examples comprising real and imaginary to understand the topic.

Example #1

Let us assume that in the fictional city of Harmonyvilla, there lives a talented florist named Alex who falls under the middle-income tax category. For his income category, the statutory tax rate is 20 percent of the annual income of 2023. During the 2023 fiscal year, Alex earned $80000 from floral sales conducted through cash and online transactions. Hence, at the end of the fiscal year, Alex calculated the statutory income tax to be :

20% of annual income = 1/5 * $80,000= $16,000

Therefore, Alex had to pay $16,000 as statutory tax to the government, making him happy to contribute towards the welfare of the nation.

Example #2

As per a news report published on CNBC on Nov 9, 2023, the IRS has announced a higher federal income-tax bracket for all in 2024. It has increased the income limit for everyone's tax bracket. As a result, married couples earning jointly over $731,200 and individuals earning more than $609,350 will have to pay an increased tax rate of 37 percent. 

It also stated that the standard deduction has also increased in 2024 to $29200 from $27,700 in 2023 for married couples, whereas individual taxpayers have to pay $14,600 instead of $13,850. Besides, low to moderate-income payers can earn higher income tax credits to a maximum of $7,830.

Both play an important role in tax collections & payment, albeit some differences as listed below:

The difference between the two, as listed below, arises out of complex phase-outs and -ins:

This article has been a guide to what is Statutory Tax Rate. Here, we compare it with the effective and marginal tax rates, and explain its examples. You may also find some useful articles here -

• Tax Accounting
• Marginal Tax Rate
• Effective Tax Rate