The concept of taxable capacity has been defined differently by
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
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
(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.
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
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".