Research / BFI Working PaperNov 29, 2020

Tax-Related Human Capital: Evidence from Employee Movements

John Barrios, John Gallemore

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. Using employee movement between the tax departments of publicly-traded U.S. corporations, we shed light on the determinants and consequences of tax-related human capital. We first show that deteriorations in firm tax performance are associated with increases in the likelihood of a tax department hire from another firm, but not other sources (e.g., public accounting). Second, we find that tax departments tend to hire from firms with similar characteristics (such as industry membership), suggesting that the nature of tax-related human capital is highly specific. Finally, we document that firms exhibit meaningful increases in tax avoidance when they hire from firms which themselves were successful at avoiding taxes, consistent with employee movement being a mechanism through which tax planning knowledge spreads across firms.

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