Excise taxes, cross-border shopping and the model KONSUM-G

This report documents the model KONSUM-G, and analyzes the effects of changes in indirect taxes. The model KONSUM-G was initially constructed in 2003 to be used by a governmental commission appointed to evaluate the effects of excise taxes and cross-border shopping (NOU 2003:17). Its mandate included examining ways of improving the tax revenue calculations associated with changes in excise taxes. Since then, the model has been refined further and is updated every autumn in connection with the drafting of the national budget at the Norwegian Ministry of Finance.

High prices on e.g. alcoholic beverages in Norway cause tax leakage in the form of high levels of cross-border shopping, tax-free shopping, and smuggling etc. When evaluating changes in indirect taxes on such goods and the ensuing effects on tax revenue, it is important to take these effects into account. In KONSUM-G, we include cross-border shopping, tax-free shopping, and smuggling, such that if taxes increase, tax leakage also increases through increased cross-border shopping etc. On the other hand, if taxes fall, Norwegians will buy more taxed goods at home in Norway, and the tax leakage will decrease.

We have used KONSUM-G to calculate tax revenue curves. These curves give us the relationship between tax revenue and tax rate level. We show that for some goods exposed to cross-border shopping etc., the tax revenue increases monotonically with the tax rate up to a certain level, and declines thereafter monotonically with the tax rate. In other words, there exists a tax revenue maximizing tax rate. However, when we consider the effects on the total tax revenue from all indirect taxation in the economy, the observed tax rates were lower than these maximizing tax rates for all goods exposed to cross-border shopping included in the model. This means that given our model and data, increasing the excise tax on e.g. spirits or wine will increase tax revenue.