Preferential regimes can make tax competition less harmful

A key feature of the recent EU and OECD standards for good behavior in international taxation is a presumption against preferential tax regimes (such as those offering advantageous treatment to non-residents or enterprises not active in the domestic market), which are seen as especially corrosive forms of tax competition. This paper shows that, on the contrary, preferential regimes may serve a useful strategic purpose in enabling countries to confine their most aggressive tax competition to particular parts of the tax system, Proscribing them therefore may-in the model here, certainly will-actually worsen tax competition.