It's that it doesn't reflect the reality that the value of software is not remotely correlated with the salaries that were spent building it. It could be valued much higher or much lower, spanning a huge range.

Using salaries as a proxy for value of the asset encourages only the safest shovelware bets, discouraging risk taking lest your asset be taxed at substantially higher than it's worth.

Avoiding that risk-adverse dynamic is why Section 174 was written the way it was since the 50s to encourage R&D, and it's paid off in spades.