Tax capacity

Tax capacity refers to the maximum amount of tax revenue that a government can generate from its economy without causing significant harm to economic growth or taxpayer well-being. It considers factors like the size of the economy, income levels, and the efficiency of tax collection systems. Essentially, it assesses how much money a government could potentially collect through taxes, taking into account the ability and willingness of individuals and businesses to pay. Understanding tax capacity helps governments plan budgets and allocate resources effectively, ensuring they can fund public services while maintaining economic stability.