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

Differences in tax rates create incentives for consumers to cross the border to shop in a low tax environment. This paper uses a unique panel data set of consumer financial transactions to study if consumers living closer to the border are less likely to buy in the home country in comparison to consumers living further away from the border. We exploit the tradeoff between distance, price and quantity after controlling for their demographics. We find that consumers living close to the border overall spend 2% less, and 32% less in substitutable categories. For goods which you cannot buy across the border (utilities and services) or distance is irrelevant (direct marketing) there is no difference in the spending behavior. Furthermore, consumers living close to another border where there are no shopping amenities across the border spend significantly more in the home country than those living close to the border with access to shopping amenities across the border. We also document significant heterogeneity – consumers spend less on high tax items like cigarette, alcohol, and groceries. Moreover, within these items they spend less in the home country on high priced cigarette, alcohol, and groceries.