The average tax rate is calculated by dividing the total amount of taxes paid by total income. Under 2006 U.S. law, for example, the rate on taxable income up to $7,500 is 10 percent, and the rate on taxable income between $7,500 and $30,650 is 15 percent. A person with $20,000 in taxable income would thus pay 10 percent on the first $7,500 of income (or $755) and 15 percent on the remaining $12,500 (or $1,875), for a total of $2,650 paid. Dividing the total taxes by the total income, one gets an average tax rate of 13.25 percent.
An average tax rate will usually be lower than a marginal tax rate, or the rate of tax paid on the last dollar earned. For those with extremely high incomes, average and marginal tax rates will be close to equal.