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What is Taxable Capacity?
Taxable Capacity refers to the maximum capacity of a community to contribute by the way of taxation. Taxable capacity of different section of the community may be said to refers to the degree of taxation, broadly speaking, beyond which productive efforts and efficiency as a whole begin to seller.
Distinguish between Absolute and Relative taxable capacity?
There are two concepts of Taxable Capacity-
• Absolute taxable capacity – The absolute taxable capacity is the capacity of an individual payer to pay tax without bearing any undesirable strain. It is the maximum limit of the tax payment of an individual tax payer beyond which the standard of living goes on changing.
• Relative taxable capacity – The relative taxable capacity compares the absolute taxable capacity of the two different tax payers with the help of relative taxable capacity. We can compare the taxable capacity of two community (rich and poor) and two region (Advance & backward).
Explain the factors determined Taxable Capacity?
The taxable capacity of a country depends on a number of factors-
• Size of National Income – The taxable capacity of a country primarily depends on the size of national income. Thus greater the national income, the greater will be its taxable capacity.
• Size of Population – Size of population affects the taxable capacity to a great extend. The larger the size of population, the lower will be the taxable capacity. This is because, as population increase per capita income decrease.
• Distribution of Income and Wealth – The distribution of national income and wealth also influence the taxable capacity of the people. If the wealth and income is unequally distributed, the taxable capacity is higher because it will be easy for the government to raise the huge amount of revenue from the rich section.
On the other hand, if distribution is more equitable, taxable capacity will be low because of government needs no revenue to bridge gap between the poor and the rich.
• Nature of Public Expenditure – The nature of public expenditure also determines the extent of taxable capacity. Welfare oriented public expenditure increases the taxable capacity. On the other hand, unproductive expenditure programme reduces taxable capacity.
• Psychology of the Tax Payers – Psychology of the Tax Payers plays a vital role to determine the taxable capacity of a country. During the war, the people are ready to make any sacrifice. This sentiment increase taxable capacity of the country.
• Standard of Living of the people – Standard of living of the people affects the taxable capacity. When standard of living increases, the taxable capacity also increases. When standard of living decreases, the taxable capacity also decreases.
• Pattern of Taxation – Taxable capacity depends upon the pattern and method of taxation. If the tax system is well planned and broad based, it will bring more revenue to the government. In such a situation taxable capacity will certainly be greater.
• Administrative efficiency – A well and efficient administrative machinery also measures the taxable capacity. If tax collecting machinery is efficient and honest, tax evasion can be avoided which increases taxable capacity.
• Economic Situation – During the period of prosperity phase of trade cycle. The taxable capacity is very high. But during depression taxable capacity reduce due to reduction in income and employment.
• Political Condition – It also determines taxable capacity of the country. Stable political system creates confidence in the mind of tax payers. In such a situation the are ready to pay their taxes properly. This will increase the taxable capacity of the community.
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