Thursday, September 03, 2009

Cross Border Arbitrage Caused By Taxes

Via Robert Wenzel I see that a Massachusetts politician by the name of Michael Rodrigues that voted for higher alcohol taxes in Massachusetts is buying his alcoholic beverages in...low-tax New Hampshire.

What is arguably even more interesting about this than the personal hypocrisy of Michael Rodrigues, is that if you tax stuff too much people will turn to substitutes, including purchases in other jurisdictions.

A very similar story can be seen in Northern Europe. Norway has the highest alcohol tax in Europe, which is why Norwegians come in large numbers to buy alcohol in Sweden. The alcohol store (like in Norway and Finland, Sweden has a retail monopoly for alcohol sales) in the border town of Strömstad is the highest selling store in Sweden due to the massive inflow of Norwegians.

Still, while alcohol taxes are lower than in Norway, Swedish alcohol taxes are higher than in Denmark, and dramatically higher than in Germany. This is why many Swedes go to Denmark and Germany to buy alcohol (the recent weakness of the Swedish krona against the euro and the Danish Krone (which is pegged to the euro) has reduced that trade, but far from eliminated it). Meanwhile, many Danes buy their alcohol in Germany.

It should not come as that big of a surprise that differences in alcohol taxation between different American states have a similar effect.


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