Taxable Capacity.

Taxable capacity means the limit to which the state can impose taxation on a person or group of persons. The taxation capacity of a country depends on its income, its geographical size,  population growth, distribution of income and wealth, pattern of taxation,  stability in income, psychology of the taxpayers, standard of living, consumption level, Exports and imports, trade pattern, technology advancement, economic situations and political conditions etc.  Taxable capacity is the surplus of production over minimum consumption. Thus, taxable capacity depends as much on income as on consumption and the psychology of the consumer and political conditions. As these conditions do not remain stable, so taxable capacity of a country is also not fixed for all times to come.

There are two concepts of taxable capacity, (1) Absolute taxable capacity, (2) Relative taxable capacity. The state should go on taxing and spending so long as the marginal benefits of public expenditure are greater than the marginal sacrifices of taxation. 

The optimum of taxation is the point where the two curves intersect, i.e. OM. Relative taxable capacity is the extent of tax burden that should be imposed on different persons to finance a common expenditure.   Relative taxable capacity indicates how a common expenditure should be financed. This implies as to how the burden of taxation should be distributed within a community. Relative taxable capacity is their relative ability to pay taxes, which is indicated by the principle of taxation.