Effective Tax Rate: Use Profit, Not Revenue
Summary
Hollow Point Trading shares a short explanation of why profit before tax—not revenue—is the right denominator for an effective tax rate. In the example, $2 million in tax expense on $10 million in profit before tax equals 20%, while dividing by $100 million in revenue gives a misleading 2%.
https://youtu.be/JUoVzH3P1yk
An effective tax rate needs the right profit denominator #Shorts
Revenue is the wrong denominator for this income tax ratio. In our hypothetical example, revenue is one hundred million dollars. Profit before tax is ten million dollars, and income tax expense is two million dollars. Tax expense divided by profit before tax gives twenty percent. Dividing that same tax expense by revenue gives two percent. Those...
