There are a number of factors that influence the taxable capacity of a country and an individual. Factors Influencing the Taxable Capacity of a Country are of Economic Aspects as we knew. The taxable capacity is influenced by the following factors –
(1) National Income. The taxable capacity of a country is directly related to the national income. An increase in national income will certainly increase the tax paying capacity of the nation and vice-versa because apart of national income is paid by the citizens in the form of taxes.
(2) Stability or National Income. The stability of national income also influences the taxable capacity of a country. If the national income of a country is not subjected to wide fluctuations, the taxable capacity of that country will be higher. The national income in developed countries like the U.S.A. and the U.K is generally stable and therefore their taxable capacity is higher than the taxable capacity of India whose national income lacks stability.
(3) Population. Other things remaining the same, the greater the increase in the size of the population the greater is the decline in the taxable capacity of a country. The reason is that the national income remains the same whereas the total expenditure on consumption increases with the increase in population. So, the per capita income decreases and consequently the taxable capacity of the country declines.
(4) Psychology of Tax-payers. The psychology of countrymen also influences their taxable capacity. Feeling of nationalism (Patriotism) raises the spirit of Individuals to pay more taxes in crisis. For example, the Chinese aggression in 1962 inspired the people of the country to pay due taxes to the Government voluntarily. They were ready to pay even more what was due. Thus the psychological factor influences the tax paying capacity.
(5) Nature of Taxation Systems. If the taxation system of the country has been devised carefully on scientific basis Considering the cannons of certainty, simplicity, convenience and equity, the taxable capacity shall naturally be high. If taxation system is devised arbitrarily, the chances of tax evasion, inconvenience etc. will be greater. Hence taxable capacity will be lower.
(6) Stage of Economic Development. The economic development of the country determines the taxable capacity. If a country is industrially and economically developed, it means there is good employment the level of income is high. Therefore, the taxable capacity of such a country is higher than that of the backward and under developed countries. The taxable capacity of American and European countries which are developed is higher than that of Asian and African countries.
(7) Inflation. The inflationary pressures reduce the taxable capacity of the countrymen as the prices of goods and services go up and their money income remains the same. Due to increase in prices, their purchasing power is reduced hence taxable capacity is also reduced.
(8) Nature of Government Expenditure. The nature of Government expenditure also influences the taxable capacity. If the Government expenditure promotes social welfare or encourages production and productivity of workers, the taxable capacity of the country will be raised sufficiently.
(9) Nature of the Government. A democratically elected Government may be in a better position to raise more revenues from the people because the people are more sympathetic and cooperative to the popular Government. But if the Government is not popular, it will be very difficult for her to collect revenue.
(10) Standard of Living. The higher standard of living of the people, increases the taxable capacity of a country because of the two reasons-
(i) The income or the people will be high in such circumstances hence they can pay more taxes, and
(ii) They will spend more and therefore they will be prepared to pay more indirect taxes while purchasing the goods and services.
(11) Distribution of Wealth in the Country. The equal distribution of wealth reduces the taxable capacity of a country. On the contrary, the unequal distribution of wealth increases the taxable capacity. The greater the inequality in wealth distribution, the greater shall be the taxable capacity. The reason is that the Government can secure more taxes from richer sections.
