Factors Influencing Taxable Capacity of an Individual: Various factors influence the taxable capacity of a country. But, there are a number of factors that influence the taxable capacity of an individual too. I am discussing some of the factors which influence the taxable capacity of an individual, shortly-
The taxable capacity of an individual is determined generally by two factors (a) his income, and (b) his expenditure,
Generally, it is presumed that an individual whose money income is more, has more capacity to pay. But, it is not always true, because:
(i) if the money value has been decreasing fast, his real income will also show a decreasing trend and therefore, his absolute taxable capacity will fall but his relative taxable capacity will not be affected at all because inflation is a common phenomenon for all.
(ii) it may also be possible that the money income of a person is less but it is greatly supported by perquisites.
In such cases, his absolute and relative taxable capacities will certainly be higher as compared to a person having similar money income but no perquisites. Thus money income is not a real index of taxable capacity.
The second factor that affects the taxable capacity of an individual is expenditure of that individual. If the total expenditure of an individual is higher, his taxable capacity may be presumed to be lower as compared to the taxable capacity of other persons, having same level of income. The higher the total expenditure of an individual, the lower is his taxable capacity.
The Government should weight the taxable capacity of different persons taking these two factors- income and expenditure into account. But, in practice, the Governments consider the income of the persons and not their expenditure. The determination of expenditure of each individual is very difficult to work.