Tax-Related Human Capital: Evidence from Employee Movements

63 Pages Posted: 10 Dec 2018 Last revised: 20 May 2019

See all articles by John Manuel Barrios

John Manuel Barrios

University of Chicago - Booth School of Business

John Gallemore

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: April 2019

Abstract

Despite the human capital in corporate tax departments representing the average firm’s most direct and substantial investment in tax compliance and planning, our understanding of it is limited. We shed light on the determinants and consequences of tax-related human capital by examining employee movement between the tax departments of large U.S. corporations. We first show that deteriorations in firm tax performance, measured either by increases in cash effective tax rates (ETRs) or tax-related internal control weaknesses or restatements, are associated with an increased likelihood of tax department hiring. Second, we find that tax departments tend to hire from firms with similar characteristics (such as industry membership, size, and the extent of foreign operations), suggesting that tax-related human capital is highly specific in nature. Finally, we document that firms exhibit meaningful increases in tax avoidance when they hire from low ETR firms, and that this association varies predictably with the employee’s prior role and experience, consistent with employee movement being a mechanism through which tax planning knowledge spreads across firms. Overall, we provide some of the first evidence on tax-related human capital and its relation to tax planning outcomes. Our findings have implications for recent trends in firms’ investments in internal tax departments.

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

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

Suggested Citation

Barrios, John Manuel and Gallemore, John, Tax-Related Human Capital: Evidence from Employee Movements (April 2019). Available at SSRN: https://ssrn.com/abstract=3285310 or http://dx.doi.org/10.2139/ssrn.3285310

John Manuel Barrios

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

John Gallemore (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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