What do you mean by taxable capacity?
The perception of taxable capacity has racked the brains of not a few economists and publicists. Dalton describes it "a dim and confused conception". Findlay Stirras, on the other hand, thinks that it is of great practical importance. "It is always wise and useful," he says, "for a government to know even roughly the limit that the country can contribute by way of taxation both in the ordinary and extra-ordinary circumstances."
Meaning of taxable capacity
One writer describes it as "the limit of squeezability". But this is a very vague definition. Some nations will permit themselves to be squeezed much less than others. Moreover, inside a nation, the limit of squeezability varies from person to person.
Another more useful definition of taxable capacity is that it is the maximum amount which can be deducted from a country's income consistent with the maintenance of that income for years to come.
To put it in another way, there must be a minimum which must be left with the people in order to ensure their continued ability and willingness to work.
Absolute and Relative Taxable Capacity
The term taxable capacity can be used in two senses: (i) in the absolute sense, and (ii) in the relative-sense. The absolute taxable capacity has been variously defined. It means how much a particular community can pay in the form of taxes without producing unpleasant effects. Relative taxable capacity, on the other hand, means the respective contribution which the two communities should make towards a common expenditure, e.g., State contribution to Central expenditure. Dalton says the former is a myth and the latter a reality. The relative limit may be reached without reaching the absolute limit, i.e., we may have reached the limit of how much a particular community should contribute without reaching the limit beyond which it possibly cannot contribute.
All these factors must be taken into account before we can have an idea about the taxable capacity of a nation. It may be that on account of the multiplicity of the factors influencing taxable capacity, we cannot measure this capacity. But this does not mean that the attempt is useless. The interest lies in the journey itself rather than in the destination.