CHAPTER XVII
INTERNATIONAL REACTIONS OF DOMESTIC TAXES

§ 1. Up to this point I have taken no account of international relations, but have argued as though we had to do with a single isolated and self-contained community. When this assumption is removed, several new and large problems arise. The first of these concerns modifications in the effects of taxes, as considered in the preceding chapters, that may result from there being an outside area to which these taxes do not apply. For, when such an area exists, it may be feasible for a man subjected to taxation in the taxed area to make use of the untaxed area in such a way as to reduce the fiscal burden imposed upon him. Prima facie two sorts of reaction are liable to be set up. First, capital, which would otherwise have been invested in the territory of the taxing authority, may be driven abroad. Secondly, persons, who would otherwise have worked and lived within that territory, may be driven abroad. Plainly, in so far as either of these things happens, the revenue yielded by taxes is made smaller than it would otherwise have been, and also, the sum of net (post-tax) income having been diminished, economic welfare in the community is likewise diminished. More generally, the process of raising a given revenue inflicts further damage in excess of that considered hitherto. New and so far unexamined dangers are threatened. It is clearly important to gauge, so far as we can, the scope and range of these in the particular case of our own country.

§ 2. Much stress is laid in popular discussion upon the risk that high British taxation, particularly high income tax, may "drive capital abroad". Clearly, a resident abroad can

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