On Capital Taxation and Economic Growth and Welfare in a Creative Region

Abstract

We follow Donovan and Batabyal (Int Rev Econ Financ, 38:67–72, 2015) and study the effects of physical capital or investment income taxation on economic growth and welfare in a region that is creative in the sense of Richard Florida. This region possesses physical and creative capital. Our analysis leads to six findings. First, we demonstrate the effect of the investment income tax ζ on steady-state consumption and physical capital per effective creative capital unit, denoted by c and k, respectively. Second, we show how the economy of our creative region responds to the implementation of ζ. Third, we compare c and k on the new balanced-growth path (BGP) with c and k on the old or pretax BGP. Fourth, we study the effect of ζ in an aggregate economy consisting of many creative regions. Fifth, we analyze whether a policy of subsidizing investment and raising the revenue for this subsidy with lump-sum taxes increases welfare in our creative region. Finally, we study the impacts in our creative region when, instead of rebating the revenue from ζ to the creative class households, the taxing authority (TA) in this region makes purchases.