Taxation and the right of exit

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The Economist's Free Exchange writes that many higher-earning Danes are voting on its tax regime . . . with their feet:

None of this is to say that the strains of commitment in Denmark have imperiled its stability in the near term. But as the low-tax, high-growth EU entrants from the east close in on the west, competition for both human and financial capital will intensify, drawing away ever more well-educated, cosmopolitan Danes-- unless they are given sufficient incentive to stay put. In effect, free migration within Europe allows wealthier Danes to bargain to keep a greater portion of their earnings. The interesting question is how hard they will bargain.

The numbers don't seem that large, but they come out of Denmark's most valuable human capital; the immigrants flowing the other way tend to be much lower skilled.

It is hard for high levels of taxation to survive a right of exit; Europe has mostly been protected (so far) by its many languages, which make it harder to move. But as the EU increases labor mobility, expect to hear more about harmful tax competition. Or more American-style efforts to keep the citizenry from moving abroad to work1.


1In case you didn't know, America, alone among developed countries, taxes the foriegn earnings of its expatriates. Also alone among developed countries, it holds you liable for taxes ten years after you renounce your citizenship, and confiscates your property if it determines that you have renounced your citizenship for the purposes of tax avoidance.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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