Efficient Regional Taxes in the Presence of Mobile Creative Capital

Abstract

We study interregional competition for mobile creative capital between regions A and B. Regional authorities (RAs) in both regions use tax policy to attract the creative capital possessing members of the creative class to their region. The resulting tax revenues help RAs finance other objectives such as the provision of one or more public goods. In this setting, we accomplish five tasks. First, we explain the significance of a parameter ζ that is related to the marginal product of creative capital. Second, we compute the Nash equilibrium tax rates when each RA chooses its tax rate to maximize tax revenue. Third, we discuss how a decline in ζ affects the Nash equilibrium tax rates. Fourth, we determine the two efficient tax rates. Finally, we discuss the implications of our analysis for a policy that raises revenue by taxing creative capital.

Can Leviathan City Governments Use Tax Policy to Attract the Creative Class?

“…That is why we have chosen to focus on a model with two cities. In this regard, we emphasize that our focus on two cities is entirely consistent with some recent contributions in the regional science literature that have also studied competition and/or interactions between cities-seeBatabyal and Nijkamp (2022b) andBatabyal and Nijkamp (2022a)by concentrating on two cities. That said, we acknowledge that, ceteris paribus, a model with three cities ©Southern Regional Science Association 2023.…”