The Effects of Immigration on Labour Tax Avoidance: An Empirical Spatial Analysis

Abstract

We investigate whether the geographic concentration of non-EU immigrants in the various Italian provinces affects labour tax avoidance (LTAV) practices adopted by firms located in the same provinces, as well as in the neighbouring provinces, and operating in construction and agriculture industries that mostly employ immigrants in Italy. For this purpose, we develop a LTAV proxy based on the financial accounting information of a sample of 993,606 firm-years disseminated throughout 108 Italian provinces over the period 2008-2016.Our results, based on a Spatial Durbin Model panel regression, reveal a statistically significant positive association between non-EU immigrant concentration and LTAV at province-level as well as the presence of spillover effects among neighbouring provinces. Our findings are robust to several additional analyses, including instrumental variable estimations to account for possible endogeneity.Our study provides empirical support to previous structuralist or marginalization theories holding that socio-economically marginalized groups, such as non-EU immigrants, are more likely to be involved in undeclared work and/or other labour exploitation practices, which could underlie our LTAV outcomes. Furthermore, it supports the need for tax authorities to strengthen controls and labour inspections, especially in those contexts where non-EU immigrants are mostly employed. On the other hand, a greater social integration and recognition of rights of immigrants may help to alleviate their situation of weakness that makes them more vulnerable to labour exploitation practices. Finally, effectively tackling LTAV, associated with the underemployment of immigrants, may prevent its negative effects for society arising from the reduction of public resources to sustain the social welfare and finance public goods and services.

Effects of the award of public service contracts on the performance and payroll of winning firms

“…Moreover, for the SSCs per employee variable (SSCEMP), we estimate a third specification (3) that includes a control for the contemporary salaries per employee (PAYEMP). Specification 3 aims at assessing whether the winning firms manage SSCs relative to the salaries on which they are computed, therefore engaging in labour tax avoidance practices (Ravenda et al, 2021).…”

“…These monitoring activities are assigned to specific labour inspection bodies other than public buyers. In this regard, several studies find that irregular employment is widespread in Italy, especially in certain sectors like construction, agriculture, and specific services (Ravenda et al, 2021;Kelmanson et al, 2019). This is an indication of the ineffectiveness of labour inspection activities in Italy.…”

“…More specifically, we seek to identify whether higher PSC awarding values and rebates lead winning firms to aggressively downward manage SSCs in a manner that, following previous studies (Ravenda et al, 2020(Ravenda et al, , 2021, may provide evidence of labour tax avoidance. It is worth noting that labour tax avoidance is not necessarily illegal.…”

“…It is worth noting that labour tax avoidance is not necessarily illegal. Indeed, similar to the concept of income tax avoidance, we include within labour tax avoidance a 'continuum of labour tax planning strategies, spanning from relatively benign strategies, envisioned by tax policies, on the left to extremely aggressive or illegal strategies on the right' (Ravenda et al, 2021). We indirectly infer labour tax avoidance by assessing the change in SSCs per employee, following the award of PSCs, conditional on salaries per employee, firm resources, and turnover, among others.…”

“…For example, recent studies confirm that undeclared work in the EU remains a concern, especially in new member states as well as in three older members: Greece, Spain, and Italy Horodnic and Williams, 2019). In addition, in several European countries, the construction industry is among the most affected by irregular employment involving undeclared work and SSC evasion (Ravenda et al, 2021;Williams, 2013;Williams et al, 2011).…”