Will US companies hire fewer engineers due to Section 174?
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It seems to me that the tax system is budget-negative for the US federal government. If we say that the budget is sustainable when the ratio of spending to GDP decreases year-over-year, then the only thing that matters is that economic growth is greater than inflation plus the cost of financing. Elimination of the tax system would imply an immediate economic expansion, and much better allocation of resources toward growth. We’re already quite far from ever thinking that we will fund the government with tax revenues, and the side effect of ongoing multi-trillion-dollar bond issuance is learning that tax revenues are probably irrelevant. So let’s just drop taxes and manage the budget in accordance with interest rate stability.
MMT makes intuitive sense as long as you keep in mind its predicate assumptions: 1) The government borrows in the currency that it issues (dollars, pounds, yen), thus the goverment can inject more money into the economy at will — thus increasing "consumer" demand for goods and services; AND 2) there's enough slack productive capacity in the economy to meet the increased demand without causing price inflation.
Stephanie Kelton's book, The Deficit Myth, was a good read.
Disclaimer: I'm unburdened by any formal economics training at all (apart from what I picked up from antitrust law).
Quaere whether MMT critics are like Ptolemaic geocentric astronomers criticizing the Copernican / Keplerian model ....
What you do see is partisan claims that any kind of overspending represents "MMT", which is of course a transparently silly argument.
The two concerns that standard economics seems to have around the government borrowing excess money is higher debt load, and crowding out.
The intuitive idea is to maximize human capital by investment in infrastructure, health, and education. Spend money in areas where the return to the country is exponentially improved over time.
As a extreme example - imagine if the government paid for high speed wireless data plans and ensured access for a poor rural community without internet access. It wouldn't be unreasonable to imagine a handful of people in that community find ways to generate income using that internet connection and therefore now are paying more in tax after year 1. At that point, it's just a math problem to argue about what should count as "value" in the equation.
MMT can only work in a world where the government is explicitly not doing MMT. The moment the government makes MMT official policy no one is gonna lend to that government.
Your premise about the currency becoming worthless is not self-evident. MMT's explicit predicate suggests the currency won't become worthless: MMT assumes there is enough slack productive capacity in the economy — or that additional capacity will be added — to accommodate the increase in demand from the additional money in the system. When that's the case, prices shouldn't rise unacceptably.
MMT makes intuitive sense, but right now we're all just speculating how the populace (and the bond market) would react to it. We also don't know whether the government has enough "instrumentation and control" to be able to manage it effectively.
In the first 11 months of 2023, the treasury ‘printed’ $22.7 Trillion. Tax revenue is about 10% of cash flow.
https://www.sifma.org/resources/research/us-treasury-securit...
If headcount stays stable eventually you go back to your 2021 taxes. If you keep growing, you keep feeling the pain.
That said, this is absolutely insane and I sincerely hope congress fixes it. Small companies are definitely squeezing raises, laying off and changing hiring plans.
You can thank FAANG for its abuses of the R&D deduction for these changes.
Since you mention it — this has nothing to do with fang and was entirely about “paying for” trumps 2017 business tax cut as it was scored by the cbo. As a tax attorney I’m sure you realize the section 174 changes impact business activities beyond what’s allowed under the r&d tax credit.
I’ll be candid, your brevity and snark sort of make you look like an ahole here.
While the section 174 changes also effect other industries that embraced tech-style accounting (mostly biotech), they generally had minimal impact on other industries because most other industries already capitalized IP derived from R&D...which is why there hasn't been any impetus to eliminate this change.
And quite frankly, many of my non-tech clients were pretty happy that the playing field was finally leveled for tech companies. The abuse of the R&D loophole let tech companies invade other industries for the worse.
I’ll be candid, your brevity and snark sort of make you look like an ahole here.
Brevity is a virtue. And your response was snarkier and ruder than my reply to your comment.
Because this change helps existing companies relative to companies that don’t already exist.
Since the beneficiaries already exist they have an incentive to protect this change, whereas the people who suffer from this, ie future founders, don’t already exist so they cannot protest it.
Also worth noting that Section 41 offers credits for R&D which helps offset this.
The latest debt ceiling bill has a fix for this, and if that doesn’t go through there are bills in the house and senate to rewind this.
Just look at the compensation gap between CEOs and software engineers:
https://www.dice.com/career-advice/income-gap-tech-ceos-soft...
I know people on HN like to think of FAANG salaries when they think of software engineers, but the vast majority get nothing close to that. And they are firmly in the “worker” category of salary ranges.
46 of 50 states have regressive taxation policies favoring the rich, and this taxation system is definitely regressive as it’s killing startups and small business’s ability to hire software developers by creating a tax punishment for doing so: a literal regressive tax as it punishes the working classes while favoring the upper classes (its definition).
https://itep.org/whopays-7th-edition/#:~:text=46%20states%20....
Poverty can look like raising a family as a single parent on a software engineering 91k average US salary in a place like NYC (when the CEO of the company you work for makes 30M a year). It’s not always Federal poverty levels that count.
I know it’s easy to dismiss this point of view as political, but that’s not my intention. It’s important that people realize how unequal even software jobs have become.
One of the main purposes of section 174 is to help foster “research or experimental expenditures”. However, the new section 174 rules are actively discouraging and effectively penalizing companies for incurring these costs because of the significant tax increase they may face as a result.
So it’s the employees who are losing their jobs due to the tax, directly. It impacts those who are working for an hourly wage, not the owners. You could argue that the owners have a shoe in the game because they can hire fewer people, which is true, but it’s actually killing software engineering jobs and it’s the penalty to employment that makes it regressive. It’s evenly applied but the effect is uneven. A regressive tax takes a higher proportion of earnings from lower-income households than those with higher incomes… that’s my point.
The top income earners don’t get hit by tax changes killing their positions, so the real threshold is whether someone is getting paid a salary or not. It deeply impacts salaried employees, not owners. Owners just have one fewer employee. That software engineer is out of a job. And it’s happening at scale and having a much larger impact than I think a lot of people realize.
Hope that makes more sense. I’m sorry if I was unclear. It’s been a day my friend… :)
I also agree it's really bad tax policy.
But later you seem to switch to definition of whether a tax is regressive by comparing owners vs employees but that seems only tangential to whether or not the tax is regressive, which every definition I've seen has more to do with income level relative to the general population, not the 0.1%.
I don’t know how much inequality needs to be to “qualify” as regressive but it’s not inappropriate to assign it to working class employees vs multimillion dollar salaries and 20-30M dollar comp packages.
A regressive tax is simply a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. Regressive taxes affect people with lower incomes (and everyone has a comparatively low income vs executive and ownership classes these days) more severely than those with higher incomes because they are applied uniformly to all situations, regardless of the taxpayer.
I’m not perfect and I might be misapplying it somehow, but that’s my understanding.
This is quite literally a tax on owners, so even by your definition this is the opposite of a regressive tax.
What this tax does do is heavily benefits incumbents over new entrants. It heavily benefits those that are already rolling in profits over those who are about to turn a loss into a profit because where it really hurts is in the margins.
Companies that have been around for a while may suffer for a couple of years as the tax is just introduced, but a few years later they will start reaping the benefits as they get tax credits from the past year.
But companies that are new will suffer at the worst possible time, right when they’re about to prove the viability of their business.