This title is pretty bait-and-switch, enough so that @dang might consider swapping it out for something more accurate. Only the first paragraph is about job trends per se. The rest is making a case for repealing the changes to Section 174, and it basically reads like a lobbyist's copy. I am weakly in agreement with the author on this topic, but the title should probably reflect the actual meat of the article.
jordanb · 12h ago
I'm kinda weekly in agreement too but I can't really square the idea that it's all Section 174 with what I've been seeing as a tech worker.
1) At my company they already were capitalizing most of our time. We have to fill out time cards characterizing most of our time as R&D. As best as I can make out this is partially tax efficiency (and maybe we're getting credits) but it's also substantially about reporting and having a similar capital/operating structure to other companies in our industry.
2) From what I've seen at my company and others, most of the layoffs have been moving job functions overseas. Axlerod points out that the amortization schedule is even worse for overseas engineers, but brushes it aside by arguing that companies can get tax benefits from foreign governments. But then he points to Germany as a country that gives the old tax treatment, which is confusing because Germany's tech employment trends are similar to the USA. In fact, in my company, we used to have large German operations all of which have been moved to cheaper European countries and India.
3) He also mentions ZIRP but only to dismiss it. That seems kinda goofy as you talk to any financier and they will say the rising risk free rate of return will eviscerate speculative investment.
4) He also fails to really even address two other trends that I have seen in our industry: maturation of the industry as a whole (and a lack of new "platform" to take off since cellphones) and a post-covid post-WFH backlash by industry leadership against more assertive workers, and a desire for labor discipline.
No doubt Section 174 is also a cause for the tech slump. How much compared to all the others? I don't know. And I support its repeal since it was just an accounting trick in the trump tax cuts. My intuition is that its effect is pretty marginal and a repeal won't change much.
lylejantzi3rd · 13h ago
It's curious he doesn't mention that the appropriations bill currently under consideration by the Senate repeals section 174.
yieldcrv · 13h ago
This is the second post I've seen on HN lobbying hard for full Section 174 restoration (repealing the bad version, putting back in full engineering salary deductions) while completely ignoring that this is in the giant budget bill that already passed the House and is in the Senate hands
I feel like its partially ignorance, and partially trying to distance themselves from benefitting from this law
Kind of annoying. This country has a class system. Wish people would just stop pretending and acknowledge where they're at, everyone for Section 174 updates will benefit from the budget and tax bill.
ecshafer · 11h ago
So am I supposed to be against this change that I believe will benefit my profession because it will.. what? Help some people more than others? I should be more masochistic and want things to be worse for myself? What should be in the Big Beautiful Bill that I can start to name it and think its a good idea?
Eisenstein · 11h ago
The parent wasn't attacking you, they were saying 'be honest about what you want'. It seems you are incredibly defensive, because on some level you realize that whatever extra advantages you are getting from the bill are going to be paid for by someone else (our future economy, probably, when the value of the dollar gets destroyed because we keep borrowing money to give it to people who already have a ton of it instead of investing it in our infrastructure and workforce).
It isn't 'masochism' to give back to society, since without it you wouldn't have the ability to make money at all.
kcb · 13h ago
Maybe its because giant catch everything bills is a purposely obscure way to legislate.
waynesonfire · 13h ago
Its because foreign software engineer labor has 15 year amortization.
atkailash · 8h ago
It does but guess what? You’re not middle class or bourgeois,, so not sure what point you’re trying to make.
You sell your labor, you don’t make money by exploiting others. And the middle class is a vague concept that is situational and effectively meaningless, particularly in the contemporary US
ineptech · 12h ago
The article presumably omits mention of Trump's "Big Beautiful Bill" because it also does a raft of other controversial[0] and broadly unpopular[1] things that are much more impactful than, and completely unrelated to, the subject of the essay.
...not to mention effectively stripping the courts of all ability to enforce decisions against him, by gutting contempt.
dingnuts · 13h ago
I can't help but notice you haven't actually said the name of the One Big Beautiful Bill. Why could that be?
Why can't we have bills that do one thing?
yieldcrv · 10h ago
I use it synonymously you can find it in my comment history 4 days ago or so
twelve40 · 11h ago
Maybe, but personally i found it much more insightful on the topic of why all companies suddenly went crazy than the Linkedin layoff porn pieces or "it's all AI's fault" hot takes.
guelo · 9h ago
Huh? Headline aint say nuttin about no job trends.
PeelingLayers · 13h ago
Section 174 was permanent, until the Tax act of 2017 pushed by the current President made them expire in 2022, under a different President. That was when the market tanked and the Layoffs began. The current bill debated in congress that has the renewal of 174 also removes judicial protection against abuse of power. Enabling government employees to do as they please without having to comply with Judicial oversight. That would give dictatorial powers to the President. 174 needs to be restore without destroying this democracy. Keep that in mind when advocating to Senators.
bloppe · 12h ago
You'd think something as basic as judicial oversight would be protected by the constitution
TylerE · 11h ago
The past few months have shown the constitution is just a piece of paper and not the magic solution y’all talk like it is. He who shall not be named is already ignoring orders from the Supreme Court (despite is being incredibly friendly to him).
Tetraslam · 13h ago
I hope more people see this.
axus · 13h ago
Reminds me of the military budget sequestration from 2011.
PeelingLayers · 11h ago
The funny thing is the full write off in section 174 was pretty much the key to a bigger middle class. By repealing it, the president created an ailment that he will only cure if he can get himself dictatorial powers. It is really valuable to the US tech sector and it made it pretty obvious why Silicon Valley had to get into politics this cycle. The old 174 allowed all software engineering work to be deducted on year on - you put in effort you get tax offsets for future profits. If that effort fails you can get acquired and the value of your salary work becomes someone else’s valuable tax offset. Bigger picture it make VC returns a LOT BETTER, which makes startups more viable with more funding, which makes good outcomes more likely - jobs, public companies that grow retirement of Americans, etc. For public companies it’s also really valuable - Meta can reduce its massive taxable profit by hiring all potential startup founders who would otherwise become competitors and keep them on the books with non-competes in exchange for slowly vesting equity. By the time your equity vests you are in your thirties and in child-making mindsets and startups are less tempting. When 174 expired Meta became very very different financially with all that expensive labour they couldn’t write off anymore and they laid off huge swaths of it. Because of the high interest rates, those potential competitors would struggle to raise money anyway.
Ifkaluva · 12h ago
I’m unclear about two things:
- This seems like it’s a big problem for small startups, but a complete non-issue for FAANG. So why are the FAANGs doing such aggressive layoffs?
- Why is this in the public discourse until just now? Until a few weeks ago, the discourse seemed to be that the sudden discontinuation of ZIRP was the primary contributor to the tech job meltdown. Suddenly the narrative is changing, but nothing is new, given that tax code change happened in 2022.
mikeflynn · 12h ago
Section 174 has definitely been talked about a lot over the last few years, (even here on HN from time to time) but it's tax code details like this that never seem to make it above hype-fueled misrepresentations like "AI Is Taking All Software Jobs!"
Yes, it's a huge problem for small startups. Many of them went from not making revenue in the eyes of the IRS to being profitable and having massive tax bills. FAANG has the ability to move things around to their EU offices, but they also have the ability to spin it and do a layoff to help with their tax burden but also cover up issues like over-spending on projects like a shift to VR that didn't go anywhere, for example.
timr · 11h ago
> Yes, it's a huge problem for small startups. Many of them went from not making revenue in the eyes of the IRS to being profitable and having massive tax bills.
Let's be clear: as a small startup this means that you went from not making any money (i.e. losing money), to losing slightly more money. It certainly sucks that you get a tax bill when you're not profitable [1], but the tax is still proportional to revenue, which for many early stage startups is small, and should be growing rapidly enough that the marginal investment in your meager R&D team is worth it. And if it isn't growing, you have bigger problems and probably shouldn't be hiring anyway. You budget for it and move on, just like you budget for anything else.
My point is that the rhetoric around this issue has made it sounds like your median founder is going to stop founding in the USA and go so somewhere else, but that's fairly silly. It isn't good to not be able to deduct salaries, but it's probably not a "massive" problem.
For the truly early stage startup it doesn't even merit consideration, because you're not making enough money for the tax to come close to a salary. US Corporate tax rate is 21%. Assuming that you aren't able to deduct anything at all, you'd have to be making $1M a year in revenue (real annual revenue, not theoretical extrapolated future revenue) to get close to a fully loaded engineer.
Where this definitely will hurt is in a large corporation that is bringing in billions of dollars in revenue, and employing many thousands of people in R&D. That's a real knock to the quarterly report, which can (and will) be found by cutting the fat -- of which there is a lot.
[1] and, to be clear, I think the change in rules are dumb and should be reverted.
kulahan · 11h ago
> Let's be clear: as a small startup this means that you went from not making any money (i.e. losing money), to losing slightly more money.
That’s not how it’s playing out in reality at all. Are you lying or confused? Small groups working on government grants are getting hit with six figure tax bills. They aren’t undergoing a minor shift; this is something that will destroy many small businesses working on research specifically, if nothing else.
timr · 11h ago
> That’s not how it’s playing out in reality at all.
The math is straightforward. You can make wild assertions all day long, but ultimately, you have to have significant revenues for this to matter on the margin.
> Small groups working on government grants are getting hit with six figure tax bills.
Setting aside the...let's say "rarity" of what you're describing -- small, for-profit groups applying for government grants (oy) as a startup -- for these orgs to truly be getting "six-figure tax bills", it means that they have to be making about half a million dollars a year in revenue (minimum), with no deductions at all.
I'm not saying that small startups aren't getting tax bills or that those bills don't suck; I'm saying that they don't explain industry wide hiring trends.
Bukhmanizer · 12h ago
I made a comment elsewhere but FAANGs can do aggressive layoffs because the startup ecosystem is so much harsher these days.
If (non-AI) startups no longer pose an existential threat to your organization, then why do you need to spend so much on talent? Your users won’t have anywhere else to go.
owebmaster · 11h ago
Exactly that. The startup scene is dead and killed venture capital. But some recent acquisitions might change that, especially openai acquiring io and meta scale ai for billions while also paying up to 9 digits salaries to 50 newly recruited AI scientists. We are watching the birth of the one-person startup
Bukhmanizer · 11h ago
Yep and note that AI is the big exception to that largely due to the lack of established regulation that heavily favours incumbents that a lot of tech ecosystems now suffer from.
xyzzy123 · 13h ago
I might agree with the author's thesis that tax code changes are the cause of the "tech job meltdown" BUT they don't provide any evidence for their claims in the article :/ This makes it punditry, not a serious economic discussion.
When I see discussion of complex economic problems (e.g. housing...) that are probably complex and multifactorial, authors often want to claim they are monocausal. It's usually a bad sign if there are no charts, graphs, numbers or quotes from people (in a position to know the truth, e.g. execs setting hiring policy) to back up their claims.
PeelingLayers · 11h ago
It’s pretty obvious if you do your own company’s taxes. The old 174 allowed all software engineering work to be deducted on year on - you put in effort you get tax offsets for future profits. If that effort fails you can get acquired and the value of your salary work becomes someone else’s valuable tax offset. Bigger picture it make VC returns a LOT BETTER, which makes startups more viable with more funding, which makes good outcomes more likely - jobs, public companies that grow retirement of Americans, etc. For public companies it’s also really valuable - Meta can reduce its massive taxable profit by hiring all potential startup founders who would otherwise become competitors and keep them on the books with non-competes in exchange for slowly vesting equity. By the time your equity vests you are in your thirties and in child-making mindsets and startups are less tempting. When 174 expired Meta became very very different financially with all that expensive labour they couldn’t write off anymore and they laid off huge swaths of it. Because of the high interest rates, those potential competitors would struggle to raise money anyway.
No comments yet
jfengel · 13h ago
Tax cuts are always made more palatable by pretending they will expire. That way the total effect on the debt is minimized.
Usually Congress just renews them anyway, and it gets less attention than the original cuts. It's just preserving the existing incentive, and handwave over the fact that it still affects the deficit projections.
The relationship between taxes and the deficit is complicated, but it's not that complicated. Deficit equals income minus expenditure. You can tell people that tax cuts pay for themselves, and they do seem content to keep believing it.
root_axis · 12h ago
I don't think it has much to do with Section 174. IMO, the explanation is that the software industry is saturated. Everything has been commoditized so it's cheaper to pay for software products than to pay engineers directly. Salaries are high and the ROI for building your own software is low. Big tech companies still need a lot of engineers, but not nearly enough to absorb the massive glut of engineers looking for jobs.
This is the new normal, like the legal industry 20 years ago
bravesoul2 · 12h ago
I think he means tropes not shibboleths
But anyway interesting summary of the situation. Is it true? As in has anyone got a giant Excel sheet and checked sources and memos to verify? It's a good theory (theory in the true sense: a model to put up to scrutiny) but some evidence would be good to see.
If correct it means jobs aren't lost they move to other countries. Where they don't it opens opportunities for other countries to compete on features not built in the US.
xnx · 13h ago
Is the author a real person? The about page is wordy but light on specific details.
readthenotes1 · 13h ago
I also object to the near misuse of "shibboleth"
bravesoul2 · 12h ago
Yes it should be tropes. I don't "object" though. It's just a mistake.
Bukhmanizer · 12h ago
The way I see it is maybe more broad. Tech companies no longer see startups as threats anymore (except for AI).
The reasons for this involve the aforementioned tax changes, the loss of ZIRP, AI, offshoring, etc., but also include a whole host of legal and regulatory hurdles.
The upshot is that Facebook/Amazon/Google are no longer threatened by (non-AI) competitors because they know that unless you come into the ecosystem with literal billions of dollars and an army of lawyers (or the backing of a large foreign government), they can crush you one vaguely worded regulation at a time, and if they can’t, they can get the current administration to ban you.
AI has largely been excepted because the law isn’t settled yet, so it’s still possible for (eg. )Google to be threatened by a smaller competitor.
briga · 12h ago
This is a nice "just so" explanation, but I don't think it is telling the full story, or even most of it. Sure tax policy probably has an impact, but so do interest rates, AI, tariffs, inflation, geopolitical turmoil, rampant speculation and hype cycles, etc. If this tax policy is so important why didn't it save the dot com crash from happening? Why are tech industries outside the US seeing similar hiring downturns? It's a boom and bust industry, we're in the bust, and it seems unlikely that one bad tax policy is the culprit.
jleyank · 13h ago
I would think there’s a similar impact on biotech/pharma which relies on research finding candidates to take into development. These companies can burn a whole lotta money and I think their job market has been brittle over the last year as well. These are ms/phd/md kinds of jobs for the most part. Sudden upturns in laoyff or surrendering companies would confirm the article.
mrosett · 12h ago
This isn’t really an issue in biotech since companies don’t have any revenue until late in their lives. Ie if I’m doing discovery work for a drug candidate today, it won’t generate revenue for 7+ years. So when if I have to amortize those costs over 5 years, that process will be complete by the time the project generates revenue.
I can’t speak to the pharma side as much, but since the 174 issue is most painful for companies with liquidity issues, I doubt it has a huge impact on them.
amacbride · 12h ago
Yes, lots of layoffs in biotech recently (Recursion is a big recent one, although some of that is post-merger restructuring after the Ex Scientia acquisition.)
byyoung3 · 11h ago
I believe is AI. A programmer is now 3x productive. As a ceo, you realize you can probably let a few people go without consequences. Also, CEO’s look and see what Elon did at twitter, and think maybe they can do the same. I wouldn’t underestimate the influence Elon has on entrepreneurs and CEOs. “If you aren’t adding pieces back in, you aren’t removing enough”.
whatever1 · 11h ago
People are not fungible. Every time you remove abruptly and replace, a part of the org memory is lost forever. Twitter never got back the media & business relations.
Unless you plan on changing business model this does not work long term
bluefirebrand · 11h ago
Are people really claiming AI has made programmers 3x more effective?
That doesn't seem remotely believable to me. It has been a tiny boost at most for me
tines · 11h ago
I would think that if a programmer were really 3x as productive, companies would be doing 3x more, not doing 1x with x/3 people.
vvpan · 13h ago
Sure, taxes, AI, etc. matter. But my intuition is that the narrative that has driven the software industry "we are changing the world" has run out of steam and it would have without all those other things. The wild Silicon Valley success stories turned into despised monopolies, extractive middlemen, uprooters of local culture, job destroyers and hijackers of attention. I can name very few large software companies that I would not be ashamed of working for. From talking to more politically minded programmers it seems to be on a lot of people's minds, that glory days of SV/VC are over.
This is not to say that software's story is over, just that the incentive mechanisms in place have failed. We could have created protocols, interoperability, local-first apps and novel funding mechanisms but the poisoned VC/shareholder money ensured that we do not.
twelve40 · 11h ago
> if we had to put up with these crazy new rules, we basically just had to bank up R&D credits for a few years and then we were back to par
ok i'm slow today, but reading this phrase... was the nasty effect of this change a one-time thing then?
ncarlson · 11h ago
VMWare had half of its employees laid off in the past two year. Hock Tan cornered the market, taking over VMWare and its competitor, Citrix. Was this caused by Sec 174, or was it just another predatory acquisition?
__turbobrew__ · 11h ago
My company is hiring lots of devs in Canada. Salary is around 2/3 of USA and sec 174 doesn’t apply.
elcritch · 9h ago
It seems to me European software dev market is doing better than the states currently. That's just my anecdotal data of looking at them the last few months.
mediumsmart · 12h ago
Maybe they can hire in low wage countries and pay tax in Ireland to save the bacon?
bravesoul2 · 12h ago
The article says that. Even without tax evoidance (see what I did!) loopholes just paying tax in another country that doesn't have the same law is advantageous.
tayo42 · 12h ago
Have companies actually said this section 174 thing has caused layoffs?
All I have seen is speculation but nothing concrete that really puts blame on this.
Section 174 being a trump thing, i would think if it was the cause of economic issues it would have been brought up endlessly because hes so polarizing, the media is addicted to trump news, he runs on being good for the economy and we just went through an election where this seems it would have been an easy thing to make him look bad. But none of that happened.
I get the logic and how people come to the conclusions, but if this piece of tax law is changed, will there really be changes in hiring?
mikeflynn · 12h ago
Yes. Absolutely. Just not the big corps. The big corps had tools to mitigate, people to cut to throw red meat to the market, and products to hype about how efficient they are now, etc.
I don't know if Big Tech will re-staff. I suspect they might to a degree, but smaller software-focused firms absolutely will. If they are surviving, they are working with a much smaller staff and would jump at the chance to add more hands.
recursivedoubts · 12h ago
When I'm emperor-dictator it will all be cash accounting unless the company explicitly wants to amortize something. Amortizing anything as amorphous as "research" is absolutely idiotic.
MichaelRo · 10h ago
I don't quite buy it. What the heck is R&D even? How much of a software development company is classified as R&D (I never heard or seen this ever in my life and I've seem some accounting sheets). Seems like bullshit to me.
If I've a software company and I sell products (licenses) and services (supports), and make $150,000 a year from a customer. Then if I pay my developer $100,000 gross salary, my expenses with development are $100k so I'm left with $50k taxable income. The developer doesn't do no R&D bullshit, we're selling accounting software not curing cancer.
As a shareholder in the company I can get money out as dividends, on which I have to pay tax but that's it and it's a lot less than the taxes on labor that the developer pays on his $100k. There's still $50k per developer x 100 developers = $5M to draw from.
I don't see where's the big issue, oh noes, no more amortization of R&D, we're fucked.
jmyeet · 12h ago
This Section 174 discourse is so deceptive and disingenuous.
The 2017 tax cuts were a massive gift, particularly for Big Tech. Billions and billions of dollars, just from the cut in Corporate Tax as well as taxes on the repatriation of foreign profits. Oh and apparently dropping that from 35% to 14% wasn't enough, because there's now a push for yet another tax holiday [1], which would save Big Tech at least $75 billion.
So if tech companies want Section 174 changed back to 100% deduction for software development costs, what tax breaks do they want to give back to pay for it exactly?
But the part that grinds my gears is blaming Section 174 for the layoffs. What a joke. Companies use layoffs to suppress wages and get more unpaid work. Nobody is demanding raises when they're in fear of losing their jobs.
If Section 174 was the reason for the layoffs, these companies wouldn't be hiring at the same time they're doing layoffs.
And consider this: if your head count is stable, then amortizing software development costs doesn't really matter. Why? Because you're only deducting 20% of this year's costs but you're now deducting 20% from each of the last 4 years too. So unless your labor costs massively changed, it's basically the same thing.
How about we end IP transfer and paying royalties to foreign subsidiaries in Ireland? Then you can have your 100% deduction.
And consider this: if your head count is stable, then amortizing software development costs doesn't really matter. Why? Because you're only deducting 20% of this year's costs but you're now deducting 20% from each of the last 4 years too. So unless your labor costs massively changed, it's basically the same thing.
tines · 11h ago
But it takes five years to ramp up right? When this came into effect, you’d already written off 100% of all previous years. You can’t double dip so you’re starting from zero.
Also, this penalizes companies for hiring doesn’t it?
rahimnathwani · 11h ago
Yes, you're starting from zero, so:
- your tax bill will be higher for the next four years, and
- these higher taxes will be totally offset by lower taxes far in the future
How would this affect the optimal hiring/firing decisions of big tech companies? Would they keep fewer engineers to save on current year's taxes, even though they have useful work for them to do?
Also, this penalizes companies for hiring doesn’t it?
How so? Hiring for non-R&D roles is unaffected. If you hire sales and customer service people, you'll still write off their cost right away.
Hiring R&D folks will be treated the same way as other forms of capital investment, so it seems like the playing field will be leveled (between hiring and other forms of capital investment).
tines · 11h ago
> How so?
The claim was “if your headcount is stable.” If it’s not stable in the upward direction, you’ll get penalized relative to the situation before, because it’ll take five years to ramp up on your tax write offs.
I’m not sure what you mean by saying that hiring r&d will be treated as other forms of capital investment. Isn’t this whole discussion about how r&d is not treated the same as it used to be?
> - these higher taxes will be totally offset by lower taxes far in the future
I think the article addresses this by stating that companies don’t run with five years’ worth of money sitting around ready to be spent on this.
rahimnathwani · 11h ago
I’m not sure what you mean by saying that hiring r&d will be treated as other forms of capital investment.
I'm countering your point about 'hiring being penalized'. I'm saying, no, it's just being treated consistently (from a cost recognition perspective) as all other types of cost.
I think the article addresses this by stating that companies don’t run with five years’ worth of money sitting around ready to be spent on this.
Google's net cash flow from operating activities is $300bn/year. Its total R&D expenditure is $50bn/year. It has $100bn cash on hand.
1) At my company they already were capitalizing most of our time. We have to fill out time cards characterizing most of our time as R&D. As best as I can make out this is partially tax efficiency (and maybe we're getting credits) but it's also substantially about reporting and having a similar capital/operating structure to other companies in our industry.
2) From what I've seen at my company and others, most of the layoffs have been moving job functions overseas. Axlerod points out that the amortization schedule is even worse for overseas engineers, but brushes it aside by arguing that companies can get tax benefits from foreign governments. But then he points to Germany as a country that gives the old tax treatment, which is confusing because Germany's tech employment trends are similar to the USA. In fact, in my company, we used to have large German operations all of which have been moved to cheaper European countries and India.
3) He also mentions ZIRP but only to dismiss it. That seems kinda goofy as you talk to any financier and they will say the rising risk free rate of return will eviscerate speculative investment.
4) He also fails to really even address two other trends that I have seen in our industry: maturation of the industry as a whole (and a lack of new "platform" to take off since cellphones) and a post-covid post-WFH backlash by industry leadership against more assertive workers, and a desire for labor discipline.
No doubt Section 174 is also a cause for the tech slump. How much compared to all the others? I don't know. And I support its repeal since it was just an accounting trick in the trump tax cuts. My intuition is that its effect is pretty marginal and a repeal won't change much.
I feel like its partially ignorance, and partially trying to distance themselves from benefitting from this law
Kind of annoying. This country has a class system. Wish people would just stop pretending and acknowledge where they're at, everyone for Section 174 updates will benefit from the budget and tax bill.
It isn't 'masochism' to give back to society, since without it you wouldn't have the ability to make money at all.
You sell your labor, you don’t make money by exploiting others. And the middle class is a vague concept that is situational and effectively meaningless, particularly in the contemporary US
0: kick 7M people off Medicaid, hire 10K new ICE officers, tax university endowments, subsidize fossil fuels, etc https://apnews.com/article/big-beautiful-bill-trump-tax-cuts...
1: "Voters 53 - 27 percent oppose the legislation, with 20 percent not offering an opinion" https://poll.qu.edu/poll-release?releaseid=3924
Why can't we have bills that do one thing?
- This seems like it’s a big problem for small startups, but a complete non-issue for FAANG. So why are the FAANGs doing such aggressive layoffs?
- Why is this in the public discourse until just now? Until a few weeks ago, the discourse seemed to be that the sudden discontinuation of ZIRP was the primary contributor to the tech job meltdown. Suddenly the narrative is changing, but nothing is new, given that tax code change happened in 2022.
Yes, it's a huge problem for small startups. Many of them went from not making revenue in the eyes of the IRS to being profitable and having massive tax bills. FAANG has the ability to move things around to their EU offices, but they also have the ability to spin it and do a layoff to help with their tax burden but also cover up issues like over-spending on projects like a shift to VR that didn't go anywhere, for example.
Let's be clear: as a small startup this means that you went from not making any money (i.e. losing money), to losing slightly more money. It certainly sucks that you get a tax bill when you're not profitable [1], but the tax is still proportional to revenue, which for many early stage startups is small, and should be growing rapidly enough that the marginal investment in your meager R&D team is worth it. And if it isn't growing, you have bigger problems and probably shouldn't be hiring anyway. You budget for it and move on, just like you budget for anything else.
My point is that the rhetoric around this issue has made it sounds like your median founder is going to stop founding in the USA and go so somewhere else, but that's fairly silly. It isn't good to not be able to deduct salaries, but it's probably not a "massive" problem.
For the truly early stage startup it doesn't even merit consideration, because you're not making enough money for the tax to come close to a salary. US Corporate tax rate is 21%. Assuming that you aren't able to deduct anything at all, you'd have to be making $1M a year in revenue (real annual revenue, not theoretical extrapolated future revenue) to get close to a fully loaded engineer.
Where this definitely will hurt is in a large corporation that is bringing in billions of dollars in revenue, and employing many thousands of people in R&D. That's a real knock to the quarterly report, which can (and will) be found by cutting the fat -- of which there is a lot.
[1] and, to be clear, I think the change in rules are dumb and should be reverted.
That’s not how it’s playing out in reality at all. Are you lying or confused? Small groups working on government grants are getting hit with six figure tax bills. They aren’t undergoing a minor shift; this is something that will destroy many small businesses working on research specifically, if nothing else.
The math is straightforward. You can make wild assertions all day long, but ultimately, you have to have significant revenues for this to matter on the margin.
> Small groups working on government grants are getting hit with six figure tax bills.
Setting aside the...let's say "rarity" of what you're describing -- small, for-profit groups applying for government grants (oy) as a startup -- for these orgs to truly be getting "six-figure tax bills", it means that they have to be making about half a million dollars a year in revenue (minimum), with no deductions at all.
I'm not saying that small startups aren't getting tax bills or that those bills don't suck; I'm saying that they don't explain industry wide hiring trends.
If (non-AI) startups no longer pose an existential threat to your organization, then why do you need to spend so much on talent? Your users won’t have anywhere else to go.
When I see discussion of complex economic problems (e.g. housing...) that are probably complex and multifactorial, authors often want to claim they are monocausal. It's usually a bad sign if there are no charts, graphs, numbers or quotes from people (in a position to know the truth, e.g. execs setting hiring policy) to back up their claims.
No comments yet
Usually Congress just renews them anyway, and it gets less attention than the original cuts. It's just preserving the existing incentive, and handwave over the fact that it still affects the deficit projections.
The relationship between taxes and the deficit is complicated, but it's not that complicated. Deficit equals income minus expenditure. You can tell people that tax cuts pay for themselves, and they do seem content to keep believing it.
This is the new normal, like the legal industry 20 years ago
But anyway interesting summary of the situation. Is it true? As in has anyone got a giant Excel sheet and checked sources and memos to verify? It's a good theory (theory in the true sense: a model to put up to scrutiny) but some evidence would be good to see.
If correct it means jobs aren't lost they move to other countries. Where they don't it opens opportunities for other countries to compete on features not built in the US.
The reasons for this involve the aforementioned tax changes, the loss of ZIRP, AI, offshoring, etc., but also include a whole host of legal and regulatory hurdles.
The upshot is that Facebook/Amazon/Google are no longer threatened by (non-AI) competitors because they know that unless you come into the ecosystem with literal billions of dollars and an army of lawyers (or the backing of a large foreign government), they can crush you one vaguely worded regulation at a time, and if they can’t, they can get the current administration to ban you.
AI has largely been excepted because the law isn’t settled yet, so it’s still possible for (eg. )Google to be threatened by a smaller competitor.
I can’t speak to the pharma side as much, but since the 174 issue is most painful for companies with liquidity issues, I doubt it has a huge impact on them.
Unless you plan on changing business model this does not work long term
That doesn't seem remotely believable to me. It has been a tiny boost at most for me
This is not to say that software's story is over, just that the incentive mechanisms in place have failed. We could have created protocols, interoperability, local-first apps and novel funding mechanisms but the poisoned VC/shareholder money ensured that we do not.
ok i'm slow today, but reading this phrase... was the nasty effect of this change a one-time thing then?
All I have seen is speculation but nothing concrete that really puts blame on this.
Section 174 being a trump thing, i would think if it was the cause of economic issues it would have been brought up endlessly because hes so polarizing, the media is addicted to trump news, he runs on being good for the economy and we just went through an election where this seems it would have been an easy thing to make him look bad. But none of that happened.
I get the logic and how people come to the conclusions, but if this piece of tax law is changed, will there really be changes in hiring?
I don't know if Big Tech will re-staff. I suspect they might to a degree, but smaller software-focused firms absolutely will. If they are surviving, they are working with a much smaller staff and would jump at the chance to add more hands.
If I've a software company and I sell products (licenses) and services (supports), and make $150,000 a year from a customer. Then if I pay my developer $100,000 gross salary, my expenses with development are $100k so I'm left with $50k taxable income. The developer doesn't do no R&D bullshit, we're selling accounting software not curing cancer.
As a shareholder in the company I can get money out as dividends, on which I have to pay tax but that's it and it's a lot less than the taxes on labor that the developer pays on his $100k. There's still $50k per developer x 100 developers = $5M to draw from.
I don't see where's the big issue, oh noes, no more amortization of R&D, we're fucked.
The 2017 tax cuts were a massive gift, particularly for Big Tech. Billions and billions of dollars, just from the cut in Corporate Tax as well as taxes on the repatriation of foreign profits. Oh and apparently dropping that from 35% to 14% wasn't enough, because there's now a push for yet another tax holiday [1], which would save Big Tech at least $75 billion.
So if tech companies want Section 174 changed back to 100% deduction for software development costs, what tax breaks do they want to give back to pay for it exactly?
But the part that grinds my gears is blaming Section 174 for the layoffs. What a joke. Companies use layoffs to suppress wages and get more unpaid work. Nobody is demanding raises when they're in fear of losing their jobs.
If Section 174 was the reason for the layoffs, these companies wouldn't be hiring at the same time they're doing layoffs.
And consider this: if your head count is stable, then amortizing software development costs doesn't really matter. Why? Because you're only deducting 20% of this year's costs but you're now deducting 20% from each of the last 4 years too. So unless your labor costs massively changed, it's basically the same thing.
How about we end IP transfer and paying royalties to foreign subsidiaries in Ireland? Then you can have your 100% deduction.
[1]: https://www.citizen.org/news/apple-microsoft-poised-to-reap-...
Also, this penalizes companies for hiring doesn’t it?
- your tax bill will be higher for the next four years, and
- these higher taxes will be totally offset by lower taxes far in the future
How would this affect the optimal hiring/firing decisions of big tech companies? Would they keep fewer engineers to save on current year's taxes, even though they have useful work for them to do?
How so? Hiring for non-R&D roles is unaffected. If you hire sales and customer service people, you'll still write off their cost right away.Hiring R&D folks will be treated the same way as other forms of capital investment, so it seems like the playing field will be leveled (between hiring and other forms of capital investment).
The claim was “if your headcount is stable.” If it’s not stable in the upward direction, you’ll get penalized relative to the situation before, because it’ll take five years to ramp up on your tax write offs.
I’m not sure what you mean by saying that hiring r&d will be treated as other forms of capital investment. Isn’t this whole discussion about how r&d is not treated the same as it used to be?
> - these higher taxes will be totally offset by lower taxes far in the future
I think the article addresses this by stating that companies don’t run with five years’ worth of money sitting around ready to be spent on this.