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Home Public Revenue and Taxation Taxable Capacity

 

Taxable Capacity:

 

Definition and Explanation of Taxable Capacity:

 

The concept of taxable capacity has been defined differently by different economists. In the words of Sir Josiah Stamp:

 

"Taxable capacity is that maximum amount which the community is in a position to bear towards the expenses of public authorities without having a really unhappy and! down-trodden existence and without dislocating the economic, organization too much".

 

According to Findlay Shiraz:

 

"It is the optimum tax ability of a nation, the maximum amount of taxation that can be raised and spent on the economic welfare in that community".

 

Dalton calls it a dim and "contused conception". He writes in his book "Principles of Public Finance":

 

"Absolute taxable capacity is a myth and should be banished from all serious discussions of public finance".

 

For the various definitions of taxable capacity given by eminent writers on Public Finance, we gather that by taxable capacity is meant the maximum amount which a nation can contribute towards the support of the government without inflicting damage on the power and will to produce.

 

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. etc.

 

In other words, we can say that 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:

 

(i) 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.

 

(ii) 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 $50,000 a month is able to pay more to the government than thirty persons earning $300 per month.

 

(iii) Character of taxation: If taxes are devised wisely, then they give less resentment from people and bring forth a large yield.

 

(iv) 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.

 

We conclude, 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.

 

(v) 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.

 

(vi) 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.

 

(vii) 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.

 

Conclusion:

 

We have discussed above various factor on which taxable capacity of a nation depends. We cannot single out any factor and say that taxable capacity is determined solely by this factor alone. The fact is that various factors influence taxable capacity and we have to take them all into consideration while judging maximum amount which citizens of a country can pay. We cannot deny this fact that it is quite difficult to measure taxable capacity. But this does not mean we should not make an attempt because it is beset with many difficulties.

 

According to Findly Shiraz:

 

"A road leading to an important centre has often many crossings, signposts, danger signals, but this does not lessen its value to cautions sojourner".

Relevant Articles:

Sources of Public Revenue
Types of Taxes
Canons/Principles of Taxation By Adam Smith
Essentials/Features/Characteristics of a Good Tax System
Theories of Taxation
Proportional Versus Progressive Taxation
Taxable Capacity
Impact and Incidence of Taxation
Direct Tax and Indirect Tax
Diffusion Theory of Taxation
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money
 

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