Should tax policy favor high- or low-productivity firms?

Heterogeneous firm productivity seems to provide an argument for
governments to pursue 'pick-the-winner' strategies by subsidizing
highly productive firms more, or taxing them less, than their less
productive counterparts. We appraise this argument by studying the
optimal choice of effective tax rates in an oligopolistic industry
with heterogeneous firms. We show that the optimal structure of tax
differentiation depends critically on the feasible level of
corporate profit taxes, which in turn depends on the degree of
international tax competition. When tax competition is moderate and
profit taxes are high, favoring high-productivity firms is indeed
the optimal policy. When tax competition is aggressive and profit
taxes are low, however, the optimal tax policy is reversed and
low-productivity firms are tax-favored.