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1. Introduction
Economists recognized that capital mobility is driven by return differences, which dates back at least to the seminal works of Karl Marx. If we control for the factor of capital return, capital flees from an economy mainly to seek lower taxes or to avoid high political risks (see e.g. Le and Zak, 2006; Lensink et al., 2000). As capital plays a crucial role in modern market economies, capital flight may hurt an economy directly and, indirectly, reduce tax revenues tax authorities can collect.
In fact, a type of exit tax has been implemented in the USA. For a US citizen or long-term resident who expatriates on or after June 17, 2008, he or she shall be deemed to have sold all assets for its fair market value the day before leaving the country. It is like an estate tax and all that gain is subject to US tax at the capital gains rate (Wood, 2010). In addition, Hillary Clinton plans to impose an exit tax on businesses that relocate outside the USA, namely, the Democrat wants to build a tax wall to stop wealthy Americans from escaping (The Wall Street Journal, 2016).
Also, “exit tax” is recently proposed in some other countries. Japan’s government plans to target wealthy individuals with an exit tax in hope of preventing them moving to a location where taxes are low, such as Singapore or Hong Kong (The Wall Street Journal, 2014). In China, an article published in the state-run People’s Daily (November, 2011), entitled “We Should Make it Harder for the Wealthy to Emigrate,” proposed an exit tax on wealthy Chinese leaving the country, and many readers and web users agreed that such a measure would benefit the majority of Chinese while limiting capital outflow (The Atlantic, 2013).
Even so, Wallace and Murphy (2012) argue that the levying of this tax can give rise to a number of problems for the taxpayer, such as cash-flow disadvantage and double taxation. In particular, the European Commission has taken action against a number of Member States on the basis that their existing exit tax provisions are incompatible with the freedom of establishment as laid down in Article 49 of the Treaty on the...