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Do Employees Matter for Firms’ Tax Planning Decisions? Evidence from Labor Mobility

We examine the impact of employee incentives on firms’ tax planning. Labor mobility refers to the flexibility of workers to find alternative employment. Higher labor mobility increases expected labor adjustment costs for firms and increases employees’ bargaining power. Therefore, firms have strong incentives to make decisions in line with employees’ preferences when labor mobility is high. Using a sample of U.S. firms from 1993-2015, we find evidence that higher labor mobility is positively associated with cash effective tax rates and negatively associated with the volatility of cash effective tax rates. Results imply that firms engage in less tax avoidance when labor mobility is higher. We find stronger results for less unionized industries and environments with lower employment security. We provide evidence of a causal effect of labor mobility on tax planning by exploiting changes in state real estate transfer taxes.