Final answer:
The effective tax rate is the average rate at which an individual or a corporation is taxed on their taxable income, not on a combination of taxable and nontaxable income. It considers various tax deductions and credits that can significantly lower the final percentage paid compared to the statutory tax rate.
Step-by-step explanation:
The statement that the effective tax rate expresses the taxpayer's total tax as a percentage of the taxpayer's taxable and nontaxable income is false.
The effective tax rate is determined by dividing the total taxes paid by the total taxable income. This rate reflects the average tax rate levied on a company's or an individual's income after accounting for tax deductions and credits. For instance, if a company had a financial statement income and received specific tax benefits for the year, those would decrease its effective tax rate compared to its statutory tax rate.
The same holds true for individual taxpayers, where the difference between marginal tax rates, which apply to the last dollar of income, and the effective tax rate can be significant. For the top 1% of households by income, despite a 28.9% average federal tax rate reflected in tax returns, the effective rate of taxes paid was 20.4%, illustrating the impact of various income sources and tax provisions, such as the earned income tax credit, on the final rate paid.