Border Trips Drain Less Tax Revenue Than Denmark’s Ministry Believed, Study Finds

For decades, one argument has surfaced again and again in Danish debates over taxes on sweets, soft drinks and beer: raise the prices, and shoppers will simply drive across the border into Germany to fill their boots with cheaper goods, taking public revenue with them. It is a claim that has shaped policy discussions about so-called sin taxes for years, and it rests on official estimates suggesting that the Danish state loses billions of kroner each year to cross-border shopping. A new study from the University of Copenhagen now challenges the arithmetic behind that argument, concluding that the true revenue loss is far smaller than the Danish Ministry of Taxation has assumed, and that for the vast majority of Danish households, cross-border shopping does not meaningfully undermine the effectiveness of taxes on unhealthy products.

The study, published in The Scandinavian Journal of Economics under the title Sin taxes in a sealed market: dilution and leakage related to cross-border shopping, was conducted by Magnus Munk Bjerg, Carl-Emil Pless, Christopher Posselt and Sinne Smed, all of the Department of Food and Resource Economics at the University of Copenhagen. Rather than estimating what Danes buy in German border shops, the researchers took a different approach: they examined what happened to Danish households’ purchasing patterns when cross-border shopping became effectively impossible during the COVID-19 border closures of 2020 and 2021. The logic is straightforward. If the authorities are correct that purchases made in Germany would simply migrate back to Danish shops in the absence of the border option, then the closure periods should reveal a large surge in domestic spending on the affected goods. What the researchers found instead was a considerably smaller shift.

The numbers at the centre of the dispute are striking. According to the Danish Ministry of Taxation, the Danish state lost DKK 1.16 billion in 2019 due to cross-border shopping, excluding tobacco products, and the ministry’s broader annual estimate for sin goods stands at approximately DKK 1.5 billion. The ministry arrives at these figures by basing its calculations on what Danes are observed buying in Germany. The University of Copenhagen team’s estimate, by contrast, comes in at DKK 415 million, roughly a third of the official figure. The gap, the researchers argue, stems from a fundamental assumption embedded in the ministry’s method: that all purchases made in Germany would instead have been made in Denmark if the border had been closed. Their findings show that this is not the case. Danes purchase only a fraction of the products in Denmark that they previously bought in Germany, which means the actual financial loss to the state is substantially smaller than the official accounting implies.

Magnus Munk Bjerg, a PhD student at the Department of Food and Resource Economics and co-author of the study, explains the distinction between the two approaches. The Ministry of Taxation bases its calculations on what Danes buy in Germany, but if the goal is to understand what Denmark actually loses, the relevant question is what happens to consumption inside Denmark. That, he says, is precisely what the research team set out to measure. He also offers a behavioural explanation for why Danes do not simply substitute the same basket of products in domestic shops once the border option disappears. Once people have packed the car or trailer and driven a considerable distance, they are likely to buy a range of additional products to make the trip worthwhile. In other words, a substantial share of what is recorded as cross-border spending is not a one-for-one substitute for domestic purchases at all, but rather additional consumption that would not otherwise occur.

The empirical design of the study exploits a natural experiment created by the pandemic. During the COVID-19 lockdowns, the closure of the Danish-German border removed the cross-border shopping option for everyone, allowing the researchers to observe how domestic demand responded when the cheaper German alternative vanished. To isolate the effect, they divided Denmark into geographic groups based on distance from the nearest border shop. Households in postcodes within 150 kilometres of the nearest border shop lost access to cross-border shopping during the lockdowns and could therefore be expected to shift their spending. These households were compared with households in postcodes across the rest of Jutland and Funen, which were affected by the same lockdowns but lived too far from the border for a cross-border trip to be financially worthwhile. Zealand, Lolland-Falster and Bornholm were excluded from the analysis because residents of those regions can access cross-border shopping via bridges and ferries, complicating the distance-based comparison. Postcode districts with no households participating in the research panel were also set aside.

The results reveal that cross-border shopping is, above all, a local phenomenon. Households living within 30 kilometres of the border increased their spending on sin goods in Danish shops by 109 percent when the border closed, a dramatic shift indicating that for these communities, shopping in Germany had been a routine and significant part of household consumption. The affected category of sin goods was broad, encompassing sweets, chocolate, crisps, soft drinks, beer, wine and spirits. Averaged across all households living within 150 kilometres of the border, spending on sin goods in Danish shops rose by 21 percent as a result of the border closure. Perhaps most telling for national policy: beyond 120 kilometres from the border, the researchers could detect no change in household consumption patterns at all. Distance, in other words, is decisive. For most of the country, the option of shopping in Germany is simply too costly and inconvenient to influence behaviour, and taxes on unhealthy products operate on those households exactly as intended.

The researchers are careful to stress that cross-border shopping remains highly significant for people living close to the border, and their findings do not erase that reality. Nevertheless, the study carries an important message for the national debate. Carl-Emil Pless, a postdoctoral researcher and co-author, notes that if the policy objective of taxing these products is both to increase government revenue and improve public health, the findings suggest that those effects are likely to be fully realised for the vast majority of Danish households. If sin taxes on these goods were increased tomorrow, the results indicate that it would primarily be people living close to the border who would respond by shopping across it. Some residents of the border region might travel to Germany even more frequently than they already do, Pless observes, but this is a relatively small group overall, and the effect is therefore primarily local rather than national.

Methodologically, the study draws on data from the YouGov Shopper Panel, a panel of Danish households that continuously records grocery purchases, giving the researchers a detailed longitudinal picture of what households bought before, during and after the border closures. To guard against artefacts of a single data source, the findings were validated using an independent dataset from Spenderlog. This dual-source validation matters for a study whose conclusions contradict official government estimates, because the credibility of the result rests on the quality of the underlying consumption data. By observing actual household behaviour in a period when the cross-border option was removed, the researchers were able to measure the substitution between German and Danish purchases directly, rather than inferring it from records of what Danes bought abroad. That direct measurement is what allows them to conclude that the leakage of tax revenue is far more limited than the ministry’s method suggests.

Beyond the specific numbers, the study has implications for how policymakers think about the optimal level of taxation on sin goods. The researchers are explicit that they are not prescribing what the tax rate should be. But their results show, in Bjerg’s words, that cross-border shopping should carry less weight when policymakers decide how taxes on unhealthy foods ought to be designed. For a country that has long weighed public health goals against the fear of revenue draining south across the border, the message is that the fear has been overstated. The revenue and health benefits of taxing sweets, soft drinks and alcohol appear to reach nearly the whole population, with the dilution effect confined to a narrow band of border communities. As debates over sugar taxes and health-motivated levies continue across Europe, the Danish case offers a quantified reminder that the geography of consumer behaviour, not just the level of the tax, determines how much a national tax policy actually loses to its neighbours.

Subject of Research: The effect of cross-border shopping on the revenue effectiveness of Danish sin taxes

Article Title: Cross-border shopping dilutes public revenue less than previously thought

Article References: Cross-border shopping dilutes public revenue less than previously thought. (n.d.). Original publication

Image Credits: AI Generated

DOI: Not provided

Keywords: sin taxes, cross-border shopping, Denmark, Germany, VAT, public revenue, Danish Ministry of Taxation, University of Copenhagen, COVID-19 border closures, consumer behaviour, unhealthy foods, tax policy