The following points highlight the top five factors determining the scope of taxable capacity. The factors are: 1. Income 2. The rate of taxes 3. The way the resources are used 4. The attitude of the people 5. Special circumstances.
Factor # 1. Income:
The level of income is no doubt the primary determinant of taxable capacity. But its nature of distribution and the rate of growth of national (also per capita income) are also important. In fact, the higher the level of income the lower the propensity to consume and the greater the scope for taxation.
Moreover, the rate of increase in income is also to be considered. A major portion of incremental income may be taxed away without any loss of incentives.
Factor # 2. The Rate of Taxes:
In developing countries like India there is not much scope for rising revenue through direct taxes because very few people have taxable income (due to high exemption limit). Contrarily high rates of such taxes encourage tax evasion and avoidance. There is scope of widening the tax base only in case of indirect taxes.
Factor # 3. The Way the Resources are Used:
If the tax revenue is spent on productive activities more income is likely to be generated in the process. This would give more scope for rising tax revenue. But, if the money is spent for providing refugee relief it will be a waste of national resources.
Factor # 4. The Attitude of the People:
The extent to which people can be taxed largely depends on their attitude. If most citizens are conscious of their responsibility to society the scope for taxation would be unlimited. The government will have to instill confidence among the people that tax revenues will be used for their benefit.
Factor # 5. Special Circumstances:
During war and emergency people are willing to contribute more to the national exchequer. This is quite obvious.
It is very difficult to decide what is the taxable capacity of the people, for it largely depends on what the government does with the revenue from the taxes. The limit of taxable capacity might be considered to be the point beyond which additional taxation would produce economically harmful results such as fall in national income that exceeds the gain from the services provided by the state from this additional taxation.
Where the government uses taxes to provide services for the community it is really returning to taxpayers the money they have paid in taxes However, depending on their income, the gain to the taxpayer maybe more or less than the sacrifice made by paying taxes.