> In other words, if a country raises
    > tax rates on returns to capital, capital
    > simply relocates somewhere else.

Certainly in the UK, money earned abroad is taxed; this is normal, rather than unusual (like, say, in Thailand, where you're only taxed on money you then bring back to Thailand). Although you can do some dodgy dealing with Non-Domicile status, this puts a kink in any simple capital flight.