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The Effects Of Preferential Vat Rates Near International Borders: Evidence From Mexico

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  • Davis, Lucas W.

Abstract

Most goods and services in Mexico are subject to a 16 percent value added tax (VAT). However, within 20 kilometers of the border with the United States, the VAT rate is 11 percent. This preferential rate was implemented by the Mexican Department of Revenue to reduce cross-border shopping in the United States. However, the tax differential also creates an unusual distortion within Mexico, encouraging Mexicans to travel to the preferential tax zone for shopping. This paper performs an empirical test of tax avoidance using the Mexican Economic Census, comparing towns on either side of the 20 kilometer threshold using a regression discontinuity design. The analysis provides evidence of a modest but statistically significant distortion in economic activity toward the preferential tax zone.

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Bibliographic Info

Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 64 (2011)
Issue (Month): 1 (March)
Pages: 85-104

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Handle: RePEc:ntj:journl:v:64:y:2011:i:1:p:85-104

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  1. Tosun Mehmet S & Skidmore Mark L, 2007. "Cross-Border Shopping and the Sales Tax: An Examination of Food Purchases in West Virginia," The B.E. Journal of Economic Analysis & Policy, De Gruyter, De Gruyter, vol. 7(1), pages 1-20, December.
  2. Verhoogen, Eric A., 2007. "Trade, Quality Upgrading and Wage Inequality in the Mexican Manufacturing Sector," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6385, C.E.P.R. Discussion Papers.
  3. Lovenheim, Michael F., 2008. "How Far to the Border?: The Extent and Impact of Cross-Border Casual Cigarette Smuggling," National Tax Journal, National Tax Association, National Tax Association, vol. 61(1), pages 7-33, March.
  4. Davis, Lucas, 2009. "International Trade in Used Vehicles: The Environmental Consequences of NAFTA," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt98j8m3r6, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Ferris, J. Stephen, 2000. "The Determinants of Cross Border Shopping: Implications for Tax Revenues and Institutional Change," National Tax Journal, National Tax Association, National Tax Association, vol. 53(n. 4), pages 801-24, December.
  6. Ohsawa, Yoshiaki, 2003. "A spatial tax harmonization model," European Economic Review, Elsevier, Elsevier, vol. 47(3), pages 443-459, June.
  7. Walsh, Michael J. & Jones, Jonathan D., 1988. "More Evidence on the "Border Tax" Effect: The Case of West Virginia, 1979-84," National Tax Journal, National Tax Association, National Tax Association, vol. 41(2), pages 261-65, June.
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Cited by:
  1. Richard M. Bird, 2013. "Below the Salt: Decentralizing Value-Added Taxes," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1302, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  2. David Agrawal, 2012. "Games within borders: are geographically differentiated taxes optimal?," International Tax and Public Finance, Springer, Springer, vol. 19(4), pages 574-597, August.

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