Factors Influencing Taxable Capacity
The variables affecting taxable capacity may be divided into several categories. The following are some important elements that affect the taxable capacity of a country:
1. Taxpayer Psychology: The way people feel and think about taxes can have a big impact on whether they follow the rules and pay their taxes willingly. Several factors can affect a person’s ability to pay taxes, including how much they believe in the importance of paying taxes, how much they trust the government, and whether they think the tax system is fair. For example, during wartime people are prepared to make greater sacrifices for the country and pay more tax.
2. Nature of the Government: A democratically elected government can raise more revenues from the public by winning public cooperation and sympathy. Therefore, in a democratic country, the taxable capacity of the people is higher as compared to a country that is ruled by a dictatorial type of government.
3. Administrative Setup of the Country: The administrative setup of a country also has an impact on its taxable capacity. For instance, a slave country generally has a low taxable capacity. It is because the people living in a slave country do not trust the foreign government and thus are not prepared to pay more taxes to it. During British rule, the taxable capacity of people living in India had a pretty low taxable capacity. Also, in a democratic country, the taxable capacity of the people is higher as compared to a country that is ruled by a dictatorial type of government. It is because the government in a country with a democratic setup can easily win the sympathy and goodwill of the people as compared to the government with a dictatorial setup.
4. State of Economic Development: The stage of the economic development of a country also acts as a factor in determining its taxable capacity. In general, a country with industrial advancement has high taxable capacity as compared to an underdeveloped or backward country.
5. Nature of the Taxation System of the Country: A country with a taxation system devised on a scientific basis will have high taxable capacity. Besides, if the government levies taxes under a scientific system, it will satisfy the canons of simplicity, certainty, and convenience, making the taxable capacity high. However, it should be kept in mind that if the taxation system of a country produces adverse effects on people’s productive capacity, then its taxable capacity will inevitably reduce.
6. Nature of Government Expenditure: If the government of a country incurs a major part of its expenditure to encourage production and to increase the efficiency level of workers, it will raise its taxable capacity. When the government spends a major part of its revenue on the industrial, agricultural, and transport development of the country, it will increase the taxable capacity during a time period. However, when the government spends a major part of its revenue on arms and ammunition, or to prepare for war, then the taxable capacity will be lower.
7. Size of Income and Wealth: A country with greater income and wealth will have greater taxable capacity.
8. Wealth Distribution in the Country: If the wealth of a country is unequally distributed, then its taxable capacity will be higher. It is because, under such circumstances, the government can secure adequate income by levying taxes on the richer section of the community. However, if the wealth is equally distributed, then the taxable capacity will be lower. It is because if the wealth is equally distributed, the overwhelming proportion of poor people will then spend their income to satisfy their basic life necessities, declining the taxable capacity of the country.
9. Increase in Production: In general, the taxable capacity of a country depends upon the population size. While keeping other things constant, if the population size increases, the taxable capacity of the country will decline. It is because that expenditure on consumption will increase with an increase in population. However, if the increase in the productive capacity of the country and the increase in its population are the same, then the taxable capacity of the country will remain unaffected.
10. Standard of Living of the People: The living standard of the citizens of a country also helps in determining its taxable capacity. If the standard of living of the people is high then their productive power will also be high. It means that the income level of these people will be high, increasing their capacity to pay taxes in the same proportion.
11. Income Stability: The taxable capacity of a country is also influenced by the stability of national income. Generally, the national income of developed countries like the USA is stable in such a way that there are no violent fluctuations in their national income. However, a country like India lacks stability in the national income. Therefore, the overwhelming majority of the people fulfil their livelihood from agriculture. But, as we know that agriculture is dependent totally on the monsoons, and if it fails; i.e., if the country faces drought, then the national income of the country will have a huge fall. Therefore, devising the taxation system on a scientific basis on account of unstable national income becomes quite difficult. Thus, the taxable capacity of such countries is usually low.
12. Inflation: While studying the taxable capacity of a country, one cannot ignore the inflationary spiral existing in the country. It happens because, due to inflation, deep repercussions arise on the taxable capacity of the country. Also, due to inflationary factors, the prices of goods and services increase; however, the purchasing power remains unchanged. Thus the real income of the country is reduced and the taxable capacity also reduces in that proportion.