### Grant McDermott

Assistant Professor
Dept. of Economics
University of Oregon

# A thought on supply-side *micro*...

The Financial Times ran a story yesterday about Britain and Switzerland closing in on a deal regarding the taxation of the undeclared assets of wealthy individuals:
Britons to be taxed on secret billions

Britons with billions of pounds hidden in Switzerland will pay tax at 50 per cent under a groundbreaking deal that will legitimise their undeclared assets, according to a source familiar with negotiations between the Swiss and British governments.

The agreement, which is expected to be announced this month, marks a shift in emphasis in the international crackdown on tax havens. Over the past two years, the focus has been on lifting bank secrecy and exposing evaders.
Very interesting and, as a quoted expert says later in the post, a development that would have seemed "unthinkable" only a few years ago. Now, I don't plan to go into the merits of tax havens per se, but the article reminded me something that crossed my mind a few weeks ago...

I was having a conversation with a (non-economist) friend about the mass protest against spending cuts that rocked the London in late March. In part of his email, my friend wrote:
[...] The gaping hole in my knowledge is the financial sector. I keep getting told about the importance of investment and the relative freedom for banks (as a cornerstone of any wealthy, growing, capitalist economy) but even so I cannot see how, in a country like England which is on the brink of executing drastic, unprecedented cuts across the public sector, how it is preferable to let the financial world 'off lightly' at the expense of the average, working-class man. If Philip Green is able to legally divert billions of pounds off-shore to avoid paying tax there has to be something wrong with the system. Surely. There is way too much freedom for greedy bastards like him. And I'd be very interested to see roughly how much money could be consolidated by tightening up these freedoms[...]
The quip about Philip Green[*] got me thinking... Has anyone ever done a "micro" study on individuals like him, looking at how their spending and investment habits differ from other high net-wealth individuals that aren't as firmly ensconced in tax havens? Do they employ as many people (both in an absolute and before-and-after sense)? Do they invest more in expanding productive capacity or research? Do they contribute more to philanthropic ventures? Etcetera, etcetera. In effect, I was guess you could say that I was thinking about whether we could design and carry out a sort of case study on supply-side / trickle-down economics.

Part of the reason that I thought this idea might be promising $$-$$ in its own little way $$-$$ is because you could analyse very similar individuals from the same country, which are effectively paying different tax rates at the same time. Unfortunately, think about this type of study for a little while and you can already list several potential stumbling blocks that threaten to derail any serious attempts to carry it out. How to find individuals that fit the bill, monitor their personal spending and investment, etc.

 Still hasn't found what he's looking for
What about companies then? Well, I'd imagine that they would offer you a more promising option in terms of data at least; provided that they have publicly-available accounts. With firms, you could look at both financial indicators (e.g. share price), as well as other "social good" criteria (e.g. do firms head-quartered in tax havens pay their staff higher wages on average). Corporations would not only make for a potentially interesting study in of themselves, but could also stand as reasonable proxies for individuals in certain cases. Sir Philip and Topshop, for instance. Although, I can think of a few more fun examples. Like... Did Bono increase his charitable activities (ahem) after U2 Inc's much publicized relocation from Ireland to tax-friendly Holland?

Looking over this post, I'm not sure how much of a point I'm trying to make... For one thing, the empirical case for (simplistic) supply-side economics $$-$$ i.e. that lower marginal tax rates will automatically boost economic performance $$-$$ has long since gone the way of the dodo as far as I am aware. Still, I've already written this whole thing out and damned if I'm going to erase it now. Judge me as you wish blogosphere!

[*] For those who don't know, Sir Philip Green is the billionaire owner of, among other things, Topshop. He has long been criticised for tax avoidance and his stores were particularly targeted by demonstrators during the aforementioned protest.
 "And then I said, 'Does this smell like chloroform?'"