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Migration and Tax Fraud

JUEST Network Research Statement

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


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).


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