Labor Tax Avoidance and Its Determinants: The Case of Mafia Firms in Italy

Abstract

This paper develops two new measures of labor tax avoidance based on social contribution expenses reported in financial statements and tests them and their determinants within a sample of 224 Italian firms defined as legally registered Mafia firms due to having been confiscated at some point by judicial authorities, in relation to alleged connections with Italian organized crime. Overall, our results reveal that before confiscation legally registered Mafia firms engage more in labor tax avoidance than lawful firms do, whereas after confiscation there is no significant difference between both types of firm. Furthermore, we find that several factors have a significant influence on the probability of engaging in such a practice.This study can enhance further research on the effectiveness of our measures and on the determinants of labor tax avoidance in other contexts and for other types of firm. Moreover, these measures can be added to the other direct and indirect methods commonly employed to measure and detect undeclared work representing a primary means of labor tax avoidance.Finally, our study allows inferring conclusions on the relation between corporate social responsibility and tax avoidance, suggesting that socially irresponsible firms, such as legally registered Mafia firms, are more likely to adopt this practice.

Evaluating risks-based communities of Mafia companies: a complex networks perspective

“…Mafias demand to exert power over specific business sectors (Allum et al 2019) and date sets of prior studies confirm that claim. For example, Ravenda et al (2015aRavenda et al ( , 2015b) used a sample of mafia-related firms mainly operating in building and construction, wholesale and retail trade, transportation and storage industries. Similarly, Savona and Riccardi (2018) and Savona and Berlusconi (2015) mapped a wide variety of business sectors in which mobsters play a vital role and conclude that construction, wholesale, transportation, healthcare and waste management are involved mostly.…”

“…The financial statements for all firms are obtained from AIDA, database but their small size, their inactivity or their liquidation status means that only 231 out of 389 Mafia companies, have financial statements available on AIDA. For each company, we reviewed the first recent financial statement available prior to the confiscation year as once confiscated Mafia companies may lose their distinctive characteristics (Ravenda et al 2015a). In doing so, we have obtained companies' financial statements ranging from 2002 to 2017.…”

“…According to Ravenda et al (2015aRavenda et al ( , 2015b, indicators based on labor and tax evasion might also be meaningful in the explanation of differences between Mafia and No Mafia companies. In line with this, Arlacchi (2007) affirms that among their "competitive advantages", companies belonging to criminal organizations frequently are not compliant with payments on social contributions; therefore the second ratio-i.e., TPSI-provides a measure of financial risk in the perspective of a company workforce.…”

Measuring labour tax avoidance and undeclared work: evidence from tax-avoidant offending firms

“…In contrast, in this paper we examine labour tax, and specifically labour tax avoidance (LTAV), with the purpose of developing a measurement methodology and validating it empirically. In this regard, labour tax comprises social security contributions (SOCs) and other insurances, computed on gross salaries of all workers, that the employers are legally required to withhold and pay to tax authorities to support the social protection of their employees (Ravenda, Argilés-Bosch, & Valencia-Silva, 2015). Similar to income tax, practices to avoid or evade the payment of labour tax are widespread among firms worldwide in various legal and institutional contexts and they are often associated with labour exploitation (Arezzo, 2014;Buehn, 2012;Williams, Nadin, & Windebank, 2011).…”

“…Based on these premises and similar to previous definitions of tax avoidance (Hanlon & Heitzman, 2010;Ravenda et al, 2015), we broadly define LTAV as the reduction of firm's explicit labour tax liability through specific procedures. Hence, we include in our definition both legal and illegal LTAV practices, given that in some cases the legality of a procedure or transaction, sometimes associated with its economic substance, cannot be clearly assessed.…”