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.