| Continued globalization has increased the mobility of economic factors. This has generated both the need and ability to attract new, outside bases for governments. One particular policy is the usage of a preferential tax regime. Whereas a nonpreferential regime imposes a uniform tax rate on all its firms, a preferential regime allows for base discrimination. In particular, foreign firms and capital are granted lower statutory rates than their domestic counterparts. For example, the Irish Finance Act of 1980 lowered the corporate income tax rate from 32 percent to 10 percent for manufacturingrelated sectors. These preferential rates were extended in 1987 to other sectors, such as technology and finance, because of their strong ties to foreign firms and investment.1 Despite Ireland’s success, the European Union (EU) and Organization for Economic Cooperation and Development are against preferential taxation and have moved to ban such practices. The fear is that decoupling the bases will generate a race to the bottom for more mobile firms. Specifically, policy makers view this as a prisoner’s dilemma scenario. Unilaterally, each country can generate weakly greater tax revenue by switching to the preferential regime, as it is simply a less constrained version (Janeba and Peters 1999). This targeted taxation produces a positive, differentiation effect. However, the concern lies over the resulting equilibrium revenues when all countries adopt the preferential regime. If everyone engages in base discrimination, there is a concurrent and negative strategic effect because of increased tax competition. Thus, the net impact depends on the relative strengths of these two effects. The economic literature lacks a strong consensus because differences in the modeling assumptions affect this balance. Janeba and Peters (1999) analyzed a two country model where they compete over a shared, mobile base. They found that preferential taxation is harmful because it heavily depresses revenues from the mobile base. Conversely, Keen (2001) found that the opposite was true in a model with two shared bases. Intuitively, the preferential regime focuses the harmful effects of tax competition on the relatively mobile base while shielding the more immobile base. Janeba and Smart (2003) rebutted this finding by arguing that the Keen (2001) result was a special case when aggregate bases are fixed. Other papers, such as Haupt and Peters (2005), Burbidge, Cuff, and Leach (2006), Bucovetsky and Haufler (2007), and Mongrain and Wilson (2017), have furthered this debate by considering the additional factors of home bias, country asymmetry, and heterogeneous moving costs, respectively |