Sustained Economic Growth and Physical Capital Taxation in a Creative Region

Batabyal, Amitrajeet and Beladi, Hamid (2022): Sustained Economic Growth and Physical Capital Taxation in a Creative Region.

Abstract

We study the properties of economic growth in a region that is driven by the activities of the so-called creative class. On the consumption side of our regional economy, we focus on an infinitely lived creative class household and on the production side of this same economy, we concentrate on a final good that is produced using creative and physical capital. In this setting, we first define and then characterize a competitive equilibrium for our regional economy. Second, we show that this competitive equilibrium is Pareto optimal. Third, we demonstrate that sustained growth in this regional economy is impossible when the value of a key parameter of the production function is less than or equal to unity. Fourth, we specify the conditions in our model that need to hold for there to be sustained economic growth. Fifth, we study what happens to the share of physical capital in our region’s total income. Finally, we analyze what happens to the asymptotic growth rate of physical capital and consumption when a regional authority taxes the returns from physical capital.

• Item Type: MPRA Paper
• Language: English
• Keywords: Capital Tax, Creative Class, Economic Growth, Pareto Optimality, Sustained Growth
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H22 - Incidence; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R11 - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

References

Acemoglu, D. 2009. Introduction to Modern Economic Growth. Princeton University Press, Princeton, NJ.

Batabyal, A.A., and Beladi, H. 2021. Interregional demand for workers and the effects of labor income taxation, Regional Science Policy and Practice, 13, 1042-1050.

Batabyal, A.A., Kourtit, K., and Nijkamp, P. 2019. Using local public goods to attract and retain the creative class: A tale of two cities, Regional Science Policy and Practice, 11, 571-581.

Batabyal, A.A., and Nijkamp, P. 2022. Interregional competition for mobile creative capital with and without physical capital mobility, International Regional Science Review, 45, 58-73.

Batabyal, A.A., and Yoo, S.J. 2018a. Schumpeterian creative class competition, innovation policy, and regional economic growth, International Review of Economics and Finance, 55, 86-97.

Batabyal, A.A., and Yoo, S.J. 2018b. A note on Schumpeterian competition in the creative class and innovation policy, Regional Science Inquiry, 10, 119-125.

Batabyal, A.A., and Yoo, S.J. 2022. Tax policy and interregional competition for mobile venture capital by the creative class, North American Journal of Economics and Finance, 61, 101690.

Boschma, R., and Fritsch, M. 2009. Creative class and regional growth: Empirical evidence from seven European countries, Economic Geography, 85, 391-423.

Buettner, T., and Janeba, E. 2016. City competition for the creative class, Journal of Cultural Economics, 40, 413-451.

Currid-Halkett, E., and Stolarick, K. 2013. Baptism by fire: Did the creative class generate economic growth during the crisis? Cambridge Journal of Regions, Economy, and Society, 6, 55-69.

Florida, R. 2002. The Rise of the Creative Class. Basic Books, New York, NY.

Florida, R. 2003. Cities and the creative class, City and Community, 2, 3-19.

Florida, R. 2005. The Flight of the Creative Class. Harper Business, New York, NY.

Florida, R. 2008. Who’s Your City? Basic Books, New York, NY.

Florida, R. 2014. The creative class and economic development, Economic Development Quarterly, 28, 196-205.

Hoyman, M., and Faricy, C. 2009. It takes a village: A test of the creative class, social capital, and human capital theories, Urban Affairs Review, 44, 311-333.

Klump, R., McAdam, P., and Wilman, A. 2012. The normalized CES production function: Theory and empirics, Journal of Economic Surveys, 26, 769-799.

McGranahan, D., and Wojan, T.R. 2007. Recasting the creative class to examine growth processes in rural and urban counties, Regional Studies, 41, 197-216.

McGranahan, D., Wojan, T.R., and Lambert, D.M. 2011. The rural growth trifecta: Outdoor amenities, creative class, and entrepreneurial context, Journal of Economic Geography, 11, 529-557.

Nathan, M. 2007. The wrong stuff? Creative class theory and economic performance in UK cities, Canadian Journal of Regional Science, 30, 433-449.

Peters, M., and Simsek, A. 2009. Solutions Manual for Introduction to Modern Economic Growth. Princeton University Press, Princeton, NJ.

Rebelo, S. 1991. Long-run policy analysis and long-run growth, Journal of Political Economy, 99, 500-521.

Sands, G., and Reese, L.A. 2008. Cultivating the creative class: And what about Nanaimo? Economic Development Quarterly, 22, 8-23.