Factors Governing Taxable Capacity
The fact is that the taxable capacity is not rigidly fixed. It is a moving point. It is relative to so many factors that any change in any of them is bound to change our estimate about the taxable capacity of a nation. Findlay Shirras gives the following factors which determine the taxable capacity of a nation.
1. Number of Inhabitants. It is pretty clear that the bigger the amount, the larger is the taxable capacity of the society to add towards the operating cost of the management. From this point of view India is well placed. Its taxable capacity will infinitely increase when the proper economic development of the country is brought about.
2. Distribution of Wealth. If capital is more uniformly disseminated, the taxable capacity will be equally abridged. But if there are big accretions of capital in the minority hands, the management can collect additional money by levying taxes on the rich.
3. Method of Taxation. A systematically created tax system with an intelligent collaboration of several types of taxes, direct as well as indirect, is certain to fetch in a better yield. Our tax system is not so much diversified, e.g., we have no taxes on large agricultural incomes. This certainly reduces the taxable capacity.
4. Purpose of Taxation. If the intention of taxation is to encourage interests of the public, they will be more eager to taxing themselves.
5. Psychology of Tax-payers. Much relies on the people's approach towards an administration. A well-liked government can stimulate the will of the public and train them for larger sacrifice. A request to nationalism is over and over again the reason of the victory of a fiscal measure. This is what makes war loans successful. Psychology of the public is a vital feature, and unless they are appropriately advanced, they might be reluctant to taxing themselves.
6. Stability of Income. If the revenue of the residents is unstable, there will be not much capacity for additional taxation. The vagaries of the monsoons in India account for a lower taxable capacity. It is only on stable incomes that long-term financial arrangements can be based.
7. Inflation. It reduces the buying capacity of the nation and it cripples countless individuals; it has an unpleasant result on taxable capacity.