Factors Determining Taxable Capacity

The lists of factors determining taxable capacity are:

  • Size of national income
  • Distribution of national income
  • Stability of income
  • Standard of living
  • Size and growth of population
  • Tax system
  • Nature of public expenditure
  • Sources of revenue
  • Price situation
  • Nature of productivity
  • Political conditions

Size of national income: The higher the national income, the higher the taxable capacity of the country and the lower the national income, the lower the taxable capacity of the country.  

Distribution of national income: If there is inequality income, taxable capacity will be high because the few rich people will be taxed heavily. And if there is (near) equality of income the taxable capacity is relatively low because the government expenditure to uplift the poor will be less.

Stability of income: Another factor determining taxable capacity is the stability of the income. Where income is table, taxable capacity is high but where incomes are subject to fluctuation, taxable capacity is low.

Standard of living: If the standard of living of the people is high, taxable capacity will also be high and if the standard of living of the people is low, the taxable capacity will be low.

Size and growth rate of population: If the size and growth rate of population are high, per capita income will be low and also, will be the taxable capacity and vice versa.

Tax system: A progressive tax system has a higher taxable capacity because it falls on higher income groups, as in the case of direct taxes on income. Whereas repressive indirect taxes which fall heavily on low income groups have low taxable capacity.

Nature of public expenditure: Taxable capacity is high when government embarks on productive expenditure which increases nation’s income and welfare of the people. This is because people do not mind paying taxes. When public expenditure is unnecessary and unproductive projects, the reverse is the case.

Sources of revenue: Taxable capacity is also a function of the number of sources of revenue available to the government; the more the number of revenue sources, the higher the taxable capacity and vice versa.

Price situation: If prices are rising, the real income of the people falls and the taxable capacity declines, but when prices are falling, real income increases and so does taxable capacity.

Nature of productivity: For agrarian economies, the taxable capacity is low while for industrial economies, it is high.

Political conditions: Taxable capacity is usually high in a politically stable country and low in a country of political instability or where the government is repressive or unsympathetic.

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