Cross-Border Shopping: Do Consumers Respond to Taxes or Prices?

Abstract

Higher sales tax or price in the home country relative to a neighboring country create a huge incentive for consumers living closer to the border to purchase goods in the neighboring country in comparison to consumers living further away from the border. Using a unique panel data set of consumer financial transactions, we find that consumers facing higher domestic sales tax and living close to the border overall spend 2 percent less domestically, and 32 percent less in substitutable categories. For goods that cannot be purchased across the border (utilities and services) or for which distance is irrelevant (direct marketing) there is no difference in spending behavior. Finally, we also look at store sales and find that domestic sales of stores near the border are lower.