Aspects of income inequality in a creative region

Abstract

We analyze a stylized creative region’s economy. There are two goods (consumption and creative capital) and creative class members differ in their income generating abilities. The distribution of abilities in the creative class population is such that the median ability is less than the average ability. There is a proportional income tax rate and all tax revenues are redistributed to the creative class members by the regional authority (RA) with a uniform, lump-sum transfer. In this setting, we perform four tasks. First, we determine the tax rate that maximizes the lump-sum transfer. Second, we show that income equality requires the tax rate to equal unity and that the poorest creative class member is better off with a lower tax rate and hence more inequality. Third, given the ith creative class member’s preference over the tax rate and the transfer, we ascertain the tax rate that will be chosen by majority voting. Finally, we discuss the connection between increasing inequality and the majority chosen tax rate.