Tax Differential and Cross-Border Shopping : Evidence from Singapore

Higher sales tax in the home country relative to a neighboring country creates a huge incentive for consumers who live closer to the border to purchase goods across the border. Using a unique panel dataset of consumer financial transactions, we find that, when facing higher domestic sales tax, consumers close to the border overall spend 3 percent less domestically and in particular 15 percent less in substitutable categories relative to those far from the border. 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 consistent evidence that domestic sales of stores near the border are lower