Political power shifts, varying tax policy, and economic outcomes in a creative region

Abstract

We analyze how a permanent shift in political power in a region that is creative a la Richard Florida affects tax policy and economic outcomes. There are three groups of individuals in our region: laborers or workers, creative class members or entrepreneurs, and the elites. The elites initially hold political power but then they lose it to the creative class. We describe the Markov perfect equilibrium of the political game between the above three groups. Specifically, we first derive the optimal taxes that are levied on the elites and on the creative class, by the creative class. Next, we compute the discounted utility of the elites when the creative class holds political power and compare this to their utility when they are in control of politics.