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Definition:

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 Shirras:

“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.

In other words, we can say that the limit of taxable capacity is a relative and not an absolute quantity.

Measuring Factors:

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 Findlay Shirras:

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