DP7814 The Gains from Preferential Tax Regimes Reconsidered

Author(s): Carl Gaigné, Ian Wooton
Publication Date: May 2010
Keyword(s): imperfect competition, preferential tax regimes, tax competition, trade costs
JEL(s): F12, H87
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7814

The EU policy against harmful tax competition aims at eliminating tax policies targeted at attracting the internationally mobile tax base. We examine this issue by considering two countries which decide their corporate tax rates their tax regimes (discriminatory or non-discriminatory tax policy). Firms produce under imperfect competition and trade between countries is costly. The endogenous spatial allocation of mobile firms depends upon different parameters of the economy while the distribution of immobile firms is exogenous. We show that countries discriminate against immobile firms when trade costs are high. Trade integration makes imposing the same tax on all firms more appealing such that, at low trade costs, the unique Nash equilibrium is characterized by uniform corporate taxes being set by both governments. However, when trade costs reach intermediates values, fiscal competition may lead to tax discrimination while uniform taxation is socially preferred