Taxable capacity of the people refers to the extent of their ability to pay tax. Four factors
affecting/influencing taxable capacity in a country are:
Number of inhabitants:
The larger the number the greater is the taxable capacity of the community to contribute towards
the expenses of the Government.
Distribution of wealth:
Where wealth is more equally distributed, the taxable capacity will be correspondingly reduced. If
accumulations of wealth in a few hands then the Government has to tax the rich highly to help the poor.
Method of taxation:
A tax system composed of various types; direct and indirect will ensure a larger yield.
Purpose of taxation:
If the purpose of taxation is to promote welfare of the people, they will be more willing to pay tax for
popular causes. If tax revenue is used to finance war, maintenance of armed forces, a costly civic service
them taxable capacity will reduce.
Others: Psychology of taxpayers, stability of incomes, rate of inflation etc.