Home >> Migration and Tax Fraud

Migration and Tax Fraud

JUEST Network Research Statement

Dr Rafal Smoczynski, Institute of Philosophy and Sociology, Polish Academy of Sciences

Introduction

Keeping in line with social remittances studies, economic sociology and social control studies the research team will seek to answer whether Eastern European migrant entrepreneurs based in the UK change their tax compliance attitudes and learn innovative ways of running business. Specifically, the research team will: 1) examine how the new macro-economic and institutional factors in British context (e.g. tax burden, labour law, the minimum wage) intersects with inherited socio-cultural contingencies (e.g. the lack of trust in the political system that is prevalent in some Eastern European countries) of sending countries (e.g. Poland) in the process of shaping tax morale attitude among the analysed migrant entrepreneurs who run companies in the UK and Eastern Europe; 2) examine how migrant entrepreneurs who run their companies in the UK and Eastern Europe learn, innovate and transfer certain new practices and normative structures; 3) examine the mediating role of civil society organizations in constraining informal economy activities among migrant entrepreneurs who run their companies in the UK and Eastern European countries. While analysing informal economy activities this project uses the following World Bank definition: ‘Market based production of goods and services that are in essence legal under prevailing laws, which is concealed to avoid payment of income taxes and social insurance contributions and to escape product and factor market regulation. The research team understands social remittances as practices which are connected to the process of learning organizational/business/production skills but also normative attitudes among the respondents who run their companies simultaneously in Eastern European countries and UK or returned to Eastern Europe (after having run a company in the UK for at least 5 years).

The project will run two envisaged research objectives:

1. Objective 1 (WP1) examines whether (1) the analysed Eastern European business people imitate or resist the tax compliance attitude of their UK business partners; and (2) whether through direct contact with the UK business environment the analysed migrant entrepreneurs learn and innovate the ways of running their companies in the UK and Eastern Europe.

Firstly, Objective 1 expands a qualitative research on the impact of exogenous cultural traits of migrant entrepreneurs in a receiving country context (Polavieja 2015). Specifically, it aims to examine whether the migrant entrepreneur’s tax morale (intrinsic normative motivation to comply with tax rules) changes in a new British institutional context which is less affected by the informal economy than in most East European countries. The innovative aspect of this objective pertains to the question of whether the analysed cultural trait (tax morale) is stable in the UK context or is subject to change as a result of experiences/learning/innovating with a new institutional setting. There is no current knowledge on this topical issue. The hypothesis of the proposed research is related to the increasing amount of data suggesting that growing trust in the government, political system and institutional environment can have a positive impact on taxpayers’ tax morality (Schaltegger, Torgler 2007). The research project will examine, among other issues, how the attitude of migrant entrepreneurs to tax payments depends on their trust in the UK state apparatus, especially in the tax authorities. This is interesting in case of entrepreneurs who previously operated in Eastern Europe where the state apparatus is associated with the low level of political and economic legitimacy, thus the project team wants to examine how entrepreneurs change or maintain their attitude towards tax compliance in a new business and legal environment (European Social Survey rounds 1-7). This research aspect may to considerable extent contribute to European Research Area given the interplay between trust and tax compliance of migrant-entrepreneurs has not been explored properly in the trans-national context.

Secondly, this objective is concerned with long-lasting effects of increasing inter-European mobility. Following a concept of social remittances (Levitt 1998, 2001; Levitt, Lamba-Nieves 2011) which explores impact of trans-national mobility on sending country communities this objective aims to focus specifically on the distribution of norms and practices in running business in the transnational context of Eastern Europe and the UK. No data have been collected on social remittances within a British-Eastern European transnational business environment. It will be examined whether through direct contacts with the British business milieu: i) organizational/production innovations were brought to the analysed respondents’ companies; ii) whether compliance with formal rules of the analysed respondents who left the shadow economy poses a competitive risk for their companies thus jeopardising a hidden advantage of operating lower costs through informal production/services/employment. To be efficient in the formal sphere besides employing price competition strategies, entrepreneurs are also expected to introduce efficient organisational structures, bringing new products or services into a market, and finding a niche for their products. This objective will empirically inquire into the question of whether the analysed entrepreneurs based both in Eastern Europe and the UK have created such innovative measures while complying with tax regulations.

2. Objective 2 (WP2) examines whether the fact of association with NGOs constrains the involvement of migrant entrepreneurs in informal economy activities in the UK.

There is no systematic knowledge in sociological literature on the role of civil society organizations (e.g. NGOs) in constraining informal economy activities of migrant entrepreneurs. While examining this problem the project follows the novel combination of social control studies and tax morale literature which emphasises the importance of individual choices informed by normative factors in explaining peoples’ incentive for tax compliance and avoiding tax fraud. Social control studies’ findings show that social organizations (e.g. religious organizations, corporate organizations, NGOs) have the ability to limit the deviant behaviour of its members (e.g. Regnerus 2003; Stack, Kposowa 2006). Keeping in line with this neo-Durkheimian perspective the proposed study will examine what is the impact of social organizations (e.g. business organizations, religious groups, corporate organizations) in reducing informal economy activities (e.g. tax fraud, social insurance contribution evasion) among migrant entrepreneurs who run their business in the UK and Eastern Europe (and who are members of NGOs and religious organizations). This insight is particularly important in studying tax fraud practiced in certain economic niches where tax fraud sometimes intertwined with other aspects of informal economy activities (e.g. failing to comply with social contribution burden) tends to create a “bad equilibrium” of the informal economy. These niches - as Andvig-Bardhan model demonstrates - embraced by prevalent informal economy activities move relentlessly toward the high-informality equilibrium and it is highly unlikely to gravitate back to the level of less informality (Andvig 1991; Bardhan 1997). Given this deadlock, the proposed project intends to examine whether the value-oriented rationality as mediated by civil society organizations is capable to interrupt a “bad equilibrium”, that is untenable for instrumental rationality and governmental control measures (Packard et al 2012).

Significance of the Project

It is estimated that currently thousands of companies run by Eastern European citizens operate in the UK. There is little systematic knowledge on this phenomenon. In order to fill in this gap the proposed project engages primarily with state of the art covering economic sociology, social remittance studies, migrant studies, social control and tax morale studies.

This project focuses specifically on post-EU accession migrants' businesses in the UK as informal economy activities often occur in newly arrived migrant enterprises (Kloosterman, Rath 1998). Also it is assumed  that informal economy activities in some Eastern European countries besides being conditioned to certain extent by the macro-economic factors might be also shaped by the specific socio-cultural regional environment that shapes the tax moral attitude of individuals (Wallace, Latcheva 2006; Kozłowski 2004). In other words, national and historical contingencies may profoundly shape attitudes to informality, which is particularly visible when analysing a discrepancy between the loyalty to the legal system and inclinations toward privatized morality commonly occurring among tax payers in European post-socialist region (Ivan 1994; Jasiecki 2003). This discrepancy and the general poor legitimacy of governmental bodies occurring in transition circumstances (Alm, Martinez-Vazquez 2003; Gardawski 2001: 182), as it is argued, may significantly impact the pattern of behaviour towards the tax compliance among migrant entrepreneurs rendering strategies of tax evasion/tax avoidance as ethically ambiguous what may occur also in the receiving country context (in this case in the UK). However, we have to note that the literature emphasises also the fact that social norms are often imitated by taxpayers who change or maintain their tax compliance attitudes according to their perceptions of others’ tax morale (Kedir et al 2011).

Given low level of generalized trust in the government and high level of trust in the EU institutions among Eastern European citizens (European Social Survey rounds 1-7) the project will examine firstly, whether the analysed migrant business people imitate or resist the tax morale of their British business partners. Whereas tax morale, to a considerable degree, is determined by macro-economic context, its shape can also be explained by socio-cultural factors (Torgler 2011). The tax morale of analysed migrant entrepreneurs is seen in this project as a probabilistic tendency that individuals of a given community share due to similar socialization processes (Polavieja 2015). This approach allows to analyse the attitudes of the respondents in non-essentialist perspective, but as a strategic toolkit, which leaves space for social change, innovation and learning. The question is thus posed of whether analysed migrant entrepreneurs tend to adapt to a British institutionalized context or whether they resist prevalent tax compliance attitude in the UK. This aspect of research contributes to an important discussion in current sociology exemplified by the literature on ‘generalized trust’. Here two approaches clash – one argues that trust is inherited through socialization and in a receiving country context remains stable whilst the second is an experiential perspective that emphasizes that trust is experience based and may be affected by the specific environment of the receiving country (Uslaner 2008; Dinesen,  Hooghe, 2010).

References

Alingham, M. G., A. Sandmo. 1972. “Income Tax Evasion: A Theoretical Analysis”, Journal of Public Economics 1: 323–338

Alm, J. and J. Martinez-Vazquez. 2003. “Institutions, Paradigms, and Tax Evasion in Developing and Transition Countries”, in J. Martinez-Vazquez and J. Alm (eds.), Public Finance in Developing and Transitional Countries – Essays in Honor of Richard Bird, Cheltenham, UK: Edward Elgar, 146–178.

Andvig, J. C. 1991. “The Economics of Corruption: A Survey”, Studi Economici 43: 57–94

Bardhan, P. 1997. “Corruption and Development: A Review of the Issues”, Journal of Economic Literature 35(3): 1320–1346

Baumol, W.J. 1990. “Entrepreneurship: Productive, Unproductive and Destructive”, Journal of Political Economy 98(5), 893–921

Beckert, J. 2006. “The Moral Embeddedness of Markets”, J. Clary, W. Dolfsma, D. M. Figart (eds.), Ethics and the Market: Insights from Social Economics, London: Routledge, pp. 11–25

Beckert, J. 2009. “The Social Order of Markets”, Theory and Society 38: 245–269.

Berg, B. 2004. Qualitative research methods for the social sciences. Boston: Allyn & Bacon

Collier, D. 2011. “Understanding Process Tracing.” PS: Political Science & Politics 44 (4): 823–30

Creswell, J. W. 2012. Educational Research: Planning, Conducting, and Evaluating Quantitative and Qualitative Research. 4th ed. Boston: Pearson

De Soto, H. 1989. The Other Path, London: Harper and Row.

Dinesen, P., Hooghe, M. 2010. When in Rome, do as the Romans do: The acculturation of generalized trust among immigrants in Western Europe. International Migration Review, 44, 697–727

Durkheim, E. [1897] (1951) Suicide: A Study in Sociology, New York: 1951 Free Press

Durkheim, E. [1900] 1957. Professional Ethics and Civil Morals, Glencoe: Free Press 

Falletti, T. G. 2006. “Theory-Guided Process-Tracing: Something Old, Something New.” APSA-CP Newsletter of the Organized Section in Comparative Politics of the American Political Science Association 17(1): 9–14

Finke, R., Adamczyk, A. 2008. “Cross-National Moral Beliefs: The Influence of National Religious Context”, Sociological Quarterly 49(4): 617–652

Frey, B, Torgler, B. 2007. “Tax Morale and Conditional Cooperation”, Journal of Comparative Economics 35: 136–159

Frey, B. 2003. ‘Deterrence and tax morale in the European Union’, European Review, 11: 385-406.

Friedman, M. 1973. ‘The Social Responsibility of Business is to Increase its Profits’, in Milton Snoeyenbos, Robert Almeder and James Humber (eds.) Business Ethics: Corporate Values and Society, New York: Prometheus Books, 73–83.

Gardawski, J. 2001. Powracająca klasa. Sektor prywatny w III Rzeczypospolitej, Warszawa: Wydawnictwo IFiS PAN

Gërxhani, K. 2004. ‘The Informal Sector in Developed and Less Developed Countries’, Public Choice, 120 (3/4).

Glock, C.Y. 1962. ‘On the study of religious commitment’, Religious Education, 57: 98-110.

Grabowska I., Garapich M.P. Jazwinska E., Radziwinowicz A. (2017). Migrants as Agent sof Change. Social Remittances in an Enlarged European Union, Basingstoke, London: Palgrave Macmillan

Granovetter, M. 1985. “Economic Action and Social Structure: The Problem of Embeddedness”, American Journal of Sociology 91: 481–510.

Hanousek, J., Palda, F. 2004. “Quality of Government Services and the Civic Duty to Pay Taxes in the Czech and Slovak Republics, and other Transition Countries”, Kyklos 2: 237–252

Ivan, G. 1994. “Modernity or a New Kind of Duality? Second Thoughts About the `Second Economy,’ in Kovacs, J. M. (ed.), Transition to Capitalism?, New Brunswick, N.J.: Transaction Publishers, 3–20.

Jasiecki, K. 2013. Kapitalizm po polsku. Warszawa: IFiS PAN

Johnson, S., Kaufmann, D., P. Zoido-Lobaton. 1998. Corruption, Public Finances and the Unofficial Economy, Discussion paper. Washington DC: The World Bank.

Kaufmann, D., Kaliberda, A. 1996. Integrating the unofficial economy into the dynamics of post-socialist economies: A framework of analysis and evidence, Washington DC: World Bank.

Kedir, A.M., Duygun, F.M. and Williams, C.C. 2011. Evaluating tax evasion in the European Union: a case study of the prevalence and character of ‘envelope wage’ payments, Department of Economics, University of Leicester, Working Paper No. 11/33, June 2011

Kloosterman, R, Rath, J. 1998. ‘Across the border. Immigrants economic opportunities, social capital and informal business activities’, Journal of ethnic and Migration Studies, 24(2): 249-268 

Kozłowski, P. 2004. Gospodarka nieformalna w Polsce. Dynamika i funkcje instytucji, Warszawa: Instytut Nauk Ekonomicznych PAN

La Porta, R., Shleifer, A. 2008. ‘The Unofficial Economy and Economic Development’, Brookings Papers on Economic Activity, Fall: 275-352.

Levitt, P. 1998. “Social Remittances: Migration Driven Local-Level Forms of Cultural Diffusion.” The International Migration Review 32 (4): 926–948.

Levitt, P. 2001. The Transnational Villagers. Berkeley: University of California Press.

Levitt, P., Lamba-Nieves, D. 2011. “Social Remittances Revisited.” Journal of Ethnic and

Migration Studies 37 (1): 1–22.

Miles, M., Huberman, M. 1994. Qualitative Data Analysis: An Expanded Sourcebook, Newbury Park, CA: Sage

Packard, T., Koettl, J., Montenegro, C. 2012. In From the Shadow, The World Bank Report, Washington, DC.

Pescosolido, B., Georgianna, S. 1989. ‘Durkheim, suicide, and religion: Toward a network theory of suicide’, American Sociological Review, 54 (1) 33-48

Polavieja, J.G. 2015. ‘Capturing Culture: A New Method to Estimate Exogenous Cultural Effects Using Migrant Populations’, American Journal of Sociology, 80(1): 166-191

Portes, A., Sassen-Koob, S. 1987. ‘Making it underground. Comparative material on the informal sector in western economies’, American Journal of Economy, 93(1): 30-61.

Regnerus, M., 2003: Moral Communities and Adolescent Delinquency: Religious Contexts and Community Social Control. The Sociological Quarterly, 44 (4): 524-554

Schaltegger, C. A., Torgler, B. 2007. “Government Accountability and Fiscal Discipline: A Panel Analysis with Swiss Data”, Journal of Public Economics 91: 117–140

Schneider, F. 2015. Size and Development of the Shadow Economy of 31 European Countries and 5 Other OECD Countries from 2003 to 2015: Different Developments, http://www.econ.jku.at/members/schneider/files/publications/2015/shadeceurope31.pdf retrived 13/09/17

Schneider, F. Enste, D. H. 2000. “Shadow Economies: Size, causes and consequences”, Journal of Economic Literature 38: 77–114

Smith, A. [1776] 1976. An Inquiry into the Nature and Causes of the Wealth of Nations, Chicago: University of Chicago Press.

Stack, S., Kposowa, A. 2006. “The Effect of Religiosity on Tax Fraud Acceptability: A Cross-National Analysis”, Journal for the Scientific Study of Religion 45(3): 325–351

Stark, R. 1996. Religion as Context: Hellfire and Delinquency One More Time, Sociology of Religion, 57: 163-173

Starke, P. 2013. “Qualitative Methods for the Study of Policy Diffusion: Challenges and Available Solutions: Qualitative Methods for the Study of Policy Diffusion.” Policy Studies Journal 41(4): 561–82.

Streeck, W. 1997. ‘Beneficial Constraints: On the Economic Limits of rational Voluntarism’, in J.R. Hollingsworth and R. Boyer (eds.) Contemporary Capitalism: The Embeddednes of Institutions, Cambridge: Cambridge University Press.

Swedberg, R. 2003. Principles of Economic Sociology, Princeton, NJ: Princeton University Press

Torgler, B. 2006. “The importance of faith: Tax morale and religiosity”, Journal of Economic Behavior and Organization 61: 81–109.

Torgler, B. 2011. ‘Tax Morale and Compliance: Review of Evidence and case Studies for Europe’, in World Bank In from the Shadow: Integrating Europe’s Informal Labor, Policy Research Working Paper 5911, Washington, DC: World Bank.

Torgler, B., Schneider, F. 2007. Shadow Economy, Tax Morale, Governance and Institutional Quality: A Panel Analysis, IZA Discussion Papers 2563, Institute for the Study of Labor (IZA).

Uslaner, E. M. 2008. Where you stand depends on where your grandparents sat: The inheritability of generalized trust. Public Opinion Quarterly, 72, 725–740

Wallace, C., Latcheva, R. 2006. “Economic Transformation outside the Law: Corruption, Trust in Public Institutions and the Informal Economy in Transition Countries of Central and Eastern Europe”, Europe-Asia Studies 58(1): 81–102

Williams, C.C., Franic, J., Dzhekova, R. 2014. “Explaining the undeclared economy in Bulgaria: An Institutional Asymmetry Perspective”, South East European Journal of Economics and Business, 9(2):33-45