Passing-through taxes beyond borders with a cobra effect

Resumen:
Does the tax pass-through effect go beyond borders? We use firm-level prices to analyze the incidence of a tax change on firms on different sides of a border in an industry with differentiated firms selling a homogeneous product. By using a difference-in-differences strategy, we find that firms' tax responses are consistent with predicted firms' best-responses. We show that the effect of the tax change was even greater after a politician publicly asked his fellow citizens to avoid crossing the border to buy. Besides suggesting that politicians should be more prudent, these findings highlight the importance of fiscal harmonization in areas without economic borders.