Tax subsidies alter the distribution of tax burdens in ways that blur the ability of researchers and policymakers to measure tax incentives at the country level, to clearly define a tax haven, and to understand firm-level tax avoidance. In the European Union (EU), control of “state aid” restricts tax subsidy competition while permitting tax rate competition; there is no U.S. corollary. The EU’s unique regulatory environment creates novel data for examining the determinants and effects of tax subsidies granted on a discriminatory basis. We find that better-governed countries are more likely to grant subsidies and to direct larger amounts of this “tax aid” toward mobile firms (i.e., firms that are part of a multinational corporation). Despite the EU regulations, we find that mobile firms enjoy significantly larger ETR reductions from tax aid than do immobile firms, even in countries already offering low tax rates. Our findings are important in light of ongoing debates about the appropriate role of preferential tax regimes in global tax competition.
