Sean O'Grady: High taxes could cause exodus to England

Radical as the Calman proposals may seem to the UK, such differential rates of taxation are a routine fact of economic life in almost every federal polity in the world and indeed for any taxpayer or business operating near an international border.

The states of the US, for example, impose a variety of taxes and duties on everything from tobacco to company profits. In Germany, each state is responsible for setting excise duties. In Australia the states taxed people, before the First World War induced the federal government to add to the tax burden. Citizens learn to live with it but in free societies there is a powerful safeguard against the most grotesque distortions: arbitrage.

Smuggling is the obvious manifestation of such economic adjustment but there are legitimate versions. If people who live in Dumfries, for example, have to pay 10p in the pound more in income tax than their neighbours over the border in Carlisle, then they will simply move. The loss of tax revenues as people drift from Scotland across the English borders would eventually force a Scottish administration to think again.

If flying from Glasgow becomes more expensive than leaving from Manchester, then again the forces of supply and demand will even things up, as passengers vote with their feet. And so on.

As every Treasury knows, the ability to levy high taxes is different in practice to what it appears to be, even in documents as thoughtful as the Calman report.

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