What are the factors that affect taxable capacity?

1. Size of National Income. Taxable capacity depends on the size of national income or wealth or natural resources of a country and the extent to which they are developed. The higher the national income, the higher the taxable capacity of a country, and vice versa.
2. Distribution of National Income. In a country where there is inequality of income, taxable capacity is high because the few rich can be taxed heavily. On the other hand, if there is equality of income, the taxable capacity is relatively low because the government expenditure to uplift the poor will be less.
3. Stability of Income. In developed countries, the incomes of individuals are stable, the taxable capacity is high. But where incomes are subject to fluctuations and are unstable, as in underdeveloped countries, the taxable capacity is low.
4. Size and Growth of Population. If the size and growth rate of population are high, the per capita income will be low. So the taxable capacity will also be low, and vice versa.
5. Standard of Living. If the standard of living of the people is high, it means that people are spending more on comforts and luxuries. So their capacity to pay taxes is also high, and vice versa.
6. Tax System. The type of tax system affects the taxable capacity. A progressive tax system has a higher taxable capacity because it falls on higher income groups, as in the case of direct taxes on incomes. On the other hand, regressive indirect taxes which fall heavily on low income groups have low taxable capacity.
7. Sources of Revenue. Taxable capacity depends on the number of sources of revenue available to the government. The greater the number of revenue sources that are productive, the higher the taxable capacity, and vice versa.
8. Public Expenditure. If public expenditure is meant to increase the welfare of the people, people do not mind paying taxes. If the government spends money on unnecessary and unproductive projects, people will not be willing to pay taxes. Thus taxable capacity is high for productive public expenditure which increase national income, and vice versa.
9. Price Situation. Taxable capacity is determined by the price situation in the country. If prices are rising, the real income of the people falls and their taxable capacity declines. The converse is the case when prices are falling.
10. Organization of the Economy. If the economy is primarily agricultural, the taxable capacity will be low because the income from agricultural operations is uncertain. On the other hand, an industrial economy has high taxable capacity because the industrial sector generates larger income than the agricultural sector.
11. Psychology of the People. Taxable capacity also depends upon the psychology of the people. People are prepared to more pay taxes honestly and willingly during a war and Natural calamities like floods, earthquakes, etc. As pointed out by Findlay Shirras, “The psychology of the people has much to do with the extent of taxable capacity. People are often willing to bear heavier taxation on patriotic or sentimental grounds. On the other hand, adverse psychology of the people towards the payment of taxes lowers down the taxable capacity.”
12. Political Conditions. What should be the level of taxation is a political factor these days. A country which has political stability, its taxable capacity will be high. If there is political instability or the government is unsympathetic and repressive; the taxable capacity will be low.

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Judiesiz answered the question on July 7, 2018 at 00:26