The gains from preferential tax regimes reconsidered

UMR 1302 UMR INRA / AGROCAMPUS OUEST : Structures et Marchés Agricoles, Ressources et Territoires, Centre de recherche de Rennes, 35011 RENNES CEDEX, FRA (SMART CG 28 CB 009936)The EU policy against harmful tax competition aims at eliminating tax policies targeted at attracting the internationally mobile tax base. We construct an imperfectly competitive model of costly trade between two countries. In setting their corporate taxes, governments non-cooperatively decide whether to discriminate between internationally mobile and immobile firms. We find the Nash equilibrium tax regimes. When trade costs are high countries impose a uniform tax on all firms while nations will discriminate between mobile and immobile firms when costs are low. At some trade costs, fiscal competition results in tax discrimination despite uniform taxation being socially preferable