Tax-Related Human Capital: Evidence from Employee Movements

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.