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 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

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