12 - Taxable Capacity, Incidence of Taxation and the Tax Burden

Abstract

This chapter discusses the taxable capacity, incidence of taxation, and the tax burden in the UK. The taxable capacity of a country is the proportion of its national income that is above the subsistence level. A limit to taxable capacity of 25% of national income has been suggested. Incidence of taxation indicates on whom the final burden of a tax rests. It can be formal or effective incidence. Some indirect taxes can be shifted to consumers depending on the price elasticity of demand. The tax burden can be measured by reference to the taxpayers or to the national economy. International comparisons of the tax burden on the basis of tax thresholds, exemptions, allowances, and rates of tax and comparisons of the percentage of national income absorbed by taxation, can lead to different conclusions as to the relative tax burden of different countries. What is a high or a low tax burden is a relative concept. State benefits should be taken into account in assessing the true tax burden on taxpayers. The hidden costs of taxation are the costs of compliance and tax avoidance. They add to the tax burden but are difficult to estimate and are not usually included in its calculation. The existence of the “black economy” and associated tax evasion, means that the tax burden is not spread on an equitable basis.