The concept of taxable capacity is very significant from a nation’s point of view because it determines and refers to the maximum capacity of the people to bear the tax burden without much difficulty and hardship. It represents a point up to which taxes may be imposed without harming the national interest and the Interest of the individual. It represents a saturation point over which taxes cannot be imposed.
If tax burden increase beyond this limit, it shall result in over-taxation which besides being injurious to the long term interest of the community, may pose a serious threat to the political stability of the country. Thus taxable capacity sets the limit beyond which Government cannot impose taxes on its citizens. A few definitions may be helpful in understanding the concept-
(1) “The taxable capacity of a country is the maximum amount which its citizens can contribute towards the expenses of public authorities without having a really unhappy and downtrodden existence and without disclosing the economic organization too much”.— Sir Josiah Stamp
(2) “Taxable capacity is the maximum amount which the citizens of a country can contribute towards the expense of public authorities, without having to undergo an unbearable strain”.— Findlay Shirras
Thus, taxable-capacity refers to a limit beyond which an additional tax brings, misery in the life of individual. They feel mentally tired and are no more interested in producing any more. At this point, the productive capacity of the tax and the country is the maximum beyond which it began to fall. There may one of the following two consequences of over taxation
(i) Honest people will make a protest but anyhow they pay it. It may be social injustice; and
(ii) Dishonest people will evade tax by hook or by crook. It will cause malpractices and promote bribe in administration. Thus the Government should avoid over taxation.
Absolute and Relative Taxable Capacity
The concept of taxable-capacity has been interpreted by the economists in two senses-
(i) The absolute taxable capacity, and
(ii) The relative taxable capacity.
(i) Absolute Taxable Capacity. It is measured in terms of money. If we say that an individual can pay only Rs.5000 as taxes, it is his absolute taxable capacity. The difference between his income and expenditure represents the total taxable-capacity of a person. In the same way, the taxable capacity of a country is represented by the difference between total production and total consumption by the people of the country as Mr. Josiah Stamp has explained. According to him, there are two limits to the capacity of a country-
(i) Check to total production and
(ii) Check to total revenue yield as a result of the imposition of the higher rates of taxation.
If an increase in taxation results in lower production and does not bring in addition tax revenue to the exchequer, it can be presumed that the taxable capacity of the country has been reached. According to Findlay Shirras, the taxable-capacity is the limit of squeezability.
The limit of squeezability has been explained by him as the production over and above the minimum level of consumption to maintain the present standard of living. According to Fraser, “the taxable-capacity of a nation is reached when tax payers are forced to borrow from the banks to pay their taxes”.
(ii) Relative Taxable Capacity. Here the taxable capacity is not measured in absolute term but in relative terms. When we say that the capacity of Indians is less than. that of Americans, it is relative measurement of taxable-capacity. Thus relative taxable capacity refers to the proportion in which two or more communities can contribute, in the form of taxes, in order to meet some common expenditure. It refers to the comparative study of taxable capacity of two communities. It is the capacity of one community to contribute to some common’ expenditure in relation to other communities, we can very easily interpret that the taxable-capacity of richer community is larger than a poorer community.
The concept of relative taxable-capacity is of great practical importance than the concept of absolute taxable capacity. The relative approach of taxable-capacity is helpful in allocating the burden of taxation on different communities in accordance with their ‘ability to pay’. The Government suggests the imposition of tax in such a way that its incidence should be more on persons who have greater taxable capacity and less on persons having lower taxable-capacity. If the Government of a country knows the relative taxable capacity of different sections of the community and can collect more taxes in emergencies from those whose taxable-capacity is higher. It also acquires significance in a country with federal set-up where different provincial units have to contribute to common expenditure according to their relative capacity. For example, the total expenditure of the U.N.O. is distributed among member nations in accordance with their relative taxable capacity.