“Taxable capacity is that maximum amount which the community is in a position to bear towards the expenses of public authorities without dislocating the economic systems. It is the optimum tax ability of a nation.
The amount of tax burden which the citizens of a country are ready to bear is not rigidly fixed. It can increase or decrease with a change in the distribution of wealth, the size of population, method of taxation, etc. In other words, the limit of taxable capacity is a relative and not an absolute quantity.
Factors of Taxable Capacity:
The main factors which determine the taxable capacity of a nation are:
- The size of population: Taxable capacity is very much affected by the increase in national income and by the rate of growth in population. If the increase in national income is greater than the growth in population, the par capita income goes up. The taxable capacity of the individuals rises. If the rate of growth of population is higher than the national income, the taxable capacity decreases.
- The distribution of national income: Taxable capacity is also influenced by the distribution of national income within a country. If there is unequal distribution of wealth in the country, the taxable capacity of the nation will be high, but if the income is equally distributed, then the taxable capacity will be low. A man earning an income of Sh.50, 000 a month is able to pay more to the government than thirty persons earning Sh.3,000 per month.
- Character of taxation: If taxes are devised wisely, then they give less resentment from people and bring forth a large yield.
- Purpose of taxation: Purpose of taxation has a direct bearing on taxable capacity of a nation. If citizens of country are satisfied with purpose. of taxation i.e., the increase in welfare of people, then they show greater willingness to pay taxes to government. Whereas, if they find that revenue will be spent for unproductive purposes, they hesitate to pay taxes.
It follows; therefore, that if state spends revenue for purposes such as education, sanitation, fighting for famine, diseases, etc., then taxable capacity of nation expands to its utmost and if revenue is spent for unproductive purpose like war, then taxable capacity shrinks.
- Psychological factor: Psychological factor is a very important factor in determining taxable capacity of a nation. If people are satisfied that government is doing its utmost to raise standard of living of masses and in maintaining prestige of country, then they try to sacrifice their lives what to say of money for the government. A simple approach to patriotism brings forth tons of gold.
- Standard of living of people: If standard of living of people is high, they work more efficiently so that they may enjoy a still better standard of living. When they work enthusiastically, they receive higher wages from their employers. Taxable capacity tends to increase then.
- Effect of inflation: If country is in grip of inflation, purchasing power of people is reduced, taxable capacity of nation shrinks considerably. But if value of money is high and country is not faced with unemployment, then taxable capacity of people is quite high.