Cross-Border Shopping: A Survey

By Leal, Andres; Lopez-Laborda, Julio et al. | International Advances in Economic Research, May 2010 | Go to article overview

Cross-Border Shopping: A Survey


Leal, Andres, Lopez-Laborda, Julio, Rodrigo, Fernando, International Advances in Economic Research


Abstract The aim of this paper is to undertake a review of the most important literature on the phenomenon of fiscally induced cross-border shopping. Following the presentation of the principal theoretical models, the study concentrates on applied literature. Firstly, the elements common to the diverse applications are described, and then, a detailed analysis of the research undertaken into cross-border shopping for alcoholic drinks, tobacco, fuel, and lotteries is provided, concluding with a reference to the interaction between cross-border purchases and those effected over the internet. The results achieved by the empirical research coincide and support the principal result of the theoretical literature: the tax differentials between neighboring territories induce consumers to purchase in the territory where taxation is lower, on the condition that the tax saving compensates for the transport costs associated with the travel made by the purchaser in order to take advantage of the lower taxation.

Keywords Cross-border shopping * Tax differences

JEL H31 * H32 * H73 * E62

Introduction

The differences in the taxation of the same good or service between neighboring countries, neighboring regions, or municipalities in the same country encourage consumers to travel to the jurisdiction where taxation is lower to acquire that good or service, as long as the tax saving compensates for the costs of traveling from one jurisdiction to another. This behavior has consequences for tax revenue collection and economic activity in the affected jurisdictions and for the welfare of individuals in those territories.

This phenomenon, known as cross-border shopping, has been widely recognized and analyzed in the literature since at least the 1930s. The existence of cross-border shopping has been shown for various time periods, spatial areas (countries, regions, local authorities), taxes (general on sales or on specific products), and goods and services (food, clothing, alcohol, tobacco, fuel, lotteries, etc.). The importance of cross-border shopping increases as two trends in the world economy intensify The first is the globalization of the economy, which substantially reduces the transaction costs associated with trade relations between territories. The second trend is the decentralization of tax-raising and expenditure powers towards intermediate levels of government within the same country, which significantly increases the number of jurisdictions with differentiated taxation of the same goods or services.

The aim of the present paper is to present a systematic review of the most important literature on cross-border shopping from a dual perspective, theoretical and applied. The theoretical works are presented in the second section of the paper and the applied works in the third. In order to reduce the review to a reasonable size, we shall concentrate exclusively on research directly related to cross-border shopping, leaving aside other subjects of undeniable importance to which that phenomenon is directly related, such as tax competition or tax incidence. Each of these topics could be the subject of a survey in itself, one more extensive than that offered here. Finally, we are not going to consider those border-crossing transactions that involve no payment of tax. They are referred to as tax-not-paid (TNP) transactions, being a well-known example of these the VAT carousel fraud. (1)

Theoretical Works

On the theoretical plane, the standard work is by Kanbur and Keen (1993) (2). Although it must be noted that, as we shall see in the following section, some previously applied research had already been firmly grounded on standard models of economic theory (such as, for example, Fisher, 1980).

The partial equilibrium model supplied by Kanbur and Keen (1993) considers an open economy with a single good and comprised of two bordering countries--national and foreign--that differ in population size. …

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