Tax Planning Knowledge Diffusion via the Labor Market

Management Science, 2023

65 Pages Posted: 4 May 2021 Last revised: 25 Apr 2023

See all articles by John Manuel Barrios

John Manuel Barrios

Washington University in St. Louis - John M. Olin Business School; National Bureau of Economic Research

John Gallemore

University of North Carolina Kenan-Flagler Business School

Multiple version iconThere are 3 versions of this paper

Date Written: October 1, 2022

Abstract

We examine the extent to which the labor market facilitates the diffusion of tax planning knowledge across firms. Using a novel dataset of tax department employee movements between S&P 1500 firms, we find that firms experience an increase in their tax planning after hiring a tax employee from a tax aggressive firm. This finding is robust to various research designs and specifications. Consistent with tax planning knowledge driving the result, we find that the tax planning benefits are more substantial when the employee is involved in a director-level role and has more experience. Further tests suggest that tax planning knowledge is highly specific in nature: the increase in tax avoidance is larger when the hiring and former firms are similar (i.e., operating in the same sector or having similar foreign operations), and firms are more likely to hire tax department employees from firms with similar characteristics. Finally, we do not find that the prior firm’s tax planning changes after the employee leaves the firm, suggesting that the tax planning knowledge simply spreads to the hiring firm and does not leave the prior firm. Our study documents the first-order role of the labor market in the diffusion of tax planning knowledge across firms, and our findings suggest that tax department human capital is a central determinant of tax planning outcomes.

Keywords: tax planning, tax avoidance, tax departments, employee movements, human capital, diffusion

JEL Classification: H25, H26, J23, J24, J44

Suggested Citation

Barrios, John Manuel and Gallemore, John, Tax Planning Knowledge Diffusion via the Labor Market (October 1, 2022). Management Science, 2023, Available at SSRN: https://ssrn.com/abstract=3837396 or http://dx.doi.org/10.2139/ssrn.3837396

John Manuel Barrios (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

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National Bureau of Economic Research ( email )

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John Gallemore

University of North Carolina Kenan-Flagler Business School ( email )

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Chapel Hill, NC 27599-3490
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HOME PAGE: http://www.johngallemore.com

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