Taxable capacity refers to the maximum capacity that a country contributes by way Of taxation in the ordinary and extraordinary’ circumstances. It represents the maximum limit to which the government can tax the people of the country. If the government exceeds this limit, it shall result in over taxation, which, besides being injurious to the long-term interests of the community may pose a serious threat to the political stability of the country concerned. the concept of taxable capacity, thus, indicates the limit to which the government can tax the citizens.
According to Sir Josaih Stamp, ” The taxable capacity ofa country is the maximum amount which its citizens can contribute towards the expenses of public authorities without having a really unhappy and downtrodden existence and without disclosing the economic organization too much”
According to Findlay Shirras, *’Taxable capacity is the amount which the citizens ofa country can contribute towards the expense Of public authorities, without having to undergo an unbearable strain.”
Taxation Inquiry Committee defined it as “Taxation capacity Of different sections of the community may be said to refer to the degree Of taxation, broadly speaking, beyond which productive effort and efficiency as a whole begins to suffer.”
The concept of taxable capacity has been interpreted by the economists in the following two senses :
(i) Absolute taxable capacity,
(ii) Relative taxable capacity.
Absolute Taxable Capacity
It refers to the maximum amount of taxation that can be collected from a community without causing any unple&ant effects. If the operation of a tax system causes unpleasant effects, the absolute taxable capacity can be said to have exceeded. According to Josiah Stamp, ‘the absolute taxable capacity of a country is represented by the difference between total production and total consumption.”
According to Findlay Shirras, taxable capacity is the limit of squeezability. In his view, whatever is produced over and above the minimum level of consumption to maintain the present standard of living, is considered the limit of squeezability. In the words of Fraser, “When the tax-payers are compelled to lend money from the banks we should think, the limit of taxable
capacity has reached.” In this case, the taxpayers are forced to borrow money from their banks so as to pay tax dues.
When the term taxable capacity is used, it always implies absolute taxable capacity.
Relative Taxable Capacity
The relative taxable capacity refers to the taxable capacity of two or more communities/countries. It is the proportion in which two or more communities!countries can contribute in the form of taxes in order to meet some common expenditure. In Other Words, the relative taxable capacity is the capacity of the community to contribute some common expenditure in relation to the capacities of other communities. The rich community shall be
called to bear upon a larger upon comparatively a large share of such common expenditure as against poor communities.
Factors Influencing the Taxable Capacity of a Country
(1) National Income: The taxable capacity Of a country is directly related to the national income. An increase in national income will certain” Increase the taxpaying capacity of the nation and vice-versa because part of national income is paid by the citizens in the form of taxes.
(2) Size and Growth of Population: The Size and Growth of Population one of the important factors determining taxable capacity. With given Volume of income of a country, the taxable capacity is indirectly proportional to the size of this population the larger the population, the lower will be the taxable capacity. Again, if the growth rate national is lower than the population, per capita income will be reduced, and vice versa.
(3) stage of Economic Development: The stage of economic development also determines taxable capacity. Generally, there is a positive correlation between the rate of economic development and the taxable capacity of the economy. Ordinarily, the taxable capacity in industrially advanced countries is higher than that of the backward and underdeveloped countries.
(4) Psychology of Tax-payers: The psychology of countrymen also influences their taxable capacity. Feel(ng of nationalism (Patriotism) raises the spirit of individuals to pay more taxes in crisis. For example, the Chinese aggression in 1962 inspired the people of the country to pay due taxes to the Government voluntarily. ‘They were ready to pay even more what was due. Thus the psychological factor influences the tax-paying capacity.
(5) Nature of Taxation System: If the taxation system of the country has been devised carefully on a scientific basis considering the canons of certainty, simplicity, convenience, and equity, the taxable capacity shall naturally be high. If taxation s) stem is devised arbitrarily, the chances of tax evasion, inconvenience, etc. will be greater, hence taxable capacity will be lower.
(6) Inflation: The inflationary pressures reduce the taxable capacity of the countrymen as the prices of goods and services go up and their money income remains the same. Due to an increase in prices, their purchasing power is reduced hence taxable capacity is also reduced.
(7) Nature or Pattern of Taxation System: The taxable capacity also depends on the nature or pattern of the taxation system in a country. If the taxation system ofa country has been devised on a scientific basis, the taxable capacity shall be inevitably high. The tax levies by the government under the scientific system will satisfy the canons of taxation. i.e., canons of certainty, simplicity, equity. convenience etc. Hence, the taxable capacity shall automatically be high.
(8) Nature or Pattern of Public Expenditure: The nature or pattern of If the government public expenditure also influences the taxable capacity. occurs a major portion of its expenditure on encouraging production and increasing the level of efficiency of workers, this will raise the taxable capacity of the country.
(9) Distribution of Income and Wealth: The distribution Of income and wealth also influences the taxable capacity of the people. The greater the inequality in the distribution Of income and wealth in a country, the greater is the taxable capacity. Since a richer community can pay a higher percentage of taxation, so also a system of distribution which leads to concentration of income and wealth in the hands ofa few may yield a higher volume of tax revenue than the one which brings about more or less equal distribution of income and wealth.
(10) Nature of the Government: A democratically elected government, by winning public sympathy and co-operation, is in a position to raise more revenues from the people.
(11) Standard of Living: If the standard of living of the people is high their productive power shall also be high. Hence, their income shall be high and consequently, their capacity to pay taxes will also increase to the same proportion.
Importance of the Concept of Taxable Capacity
The concept of taxable capacity is important for an economy due to various reasons mentioned below :
- It helps in widening the tax structure without creating any adverse effect on the economy and society.
- It helps in mobilization of resources for economic planning.
- It helps in establishing healthy co-ordination between center & state governments in a federal financial system.
- It helps in mobilization of resources during wartime.
- The taxation burden can be distributed on the basis of justice in taxation.
- It helps in exploring potential economic surplus.