Tax competition with heterogeneous capital mobility

An ongoing debate in the tax competition literature is whether a system of countries or regions should restrict the preferential tax treatment of different types of firms or capital. We further investigate this issue by departing from the bulk of the literature in three ways: (1) rather than maximize only tax revenue, governments also put positive weight on the income generated by resident-owned firms; (2) under preferential taxation, firms are distinguished by their country of origin; and (3) the competing regions are allowed to differ in size. Under the assumption of uniformly-distributed moving costs, identical regions always prefer the non-preferential regime. But when a small and large region compete, the small region prefers the preferential regime in some cases. We also identify non-uniform distributions of moving costs where the preferential regime is preferred by identical competing regions. This finding is related to differences in tax-base elasticities.