Tax Planning Knowledge Diffusion via the Labor Market

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 this result, we find that the tax planning benefit of hiring an employee from a tax aggressive firm is stronger when the employee likely played a role in the prior firm’s successful tax planning, is more likely to have control over the hiring firm’s tax strategy, and when the hiring firm likely had less tax planning knowledge prior to the hire. 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. Our study documents the first-order role of the labor market in the diffusion of tax planning knowledge across firms, and indicates that tax department human capital is a central determinant of tax planning outcomes.

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

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