The Tech Job Meltdown
professoraxelrod.com
professoraxelrod.com
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.
Why can't we have bills that do one thing?
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
It isn't 'masochism' to give back to society, since without it you wouldn't have the ability to make money at all.
I’m saying the opposite. Be happy that laws are benefiting you. Lean into your actual privilege because we aren’t in this together and we should stop pretending we are.
Lets be excited that tech employment sector is about to get supercharged after year’s of convulsion and questioning its viability with new trends like generative AI.
Specifically because Congress can always correct other aspects of a big law they passed. They can do it quickly! The fact that they don't is a completely separate issue that you could put energy towards if you were using activism energy efficiently.
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
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.
- Pandemic swells from tech was cooling off. It was simply not going to be a situation that facilitated constant growthong term. Likewise, this tail end also meant another round of trying to outsource tech overseas, now that companies spent a few years forcibly adjusting to remote work.
- some new privacy policies in Apple and Android changed that made it harder for ad tech to do their jobs. Great for consumers, but this does mean that a part of tech would be hit hard over the impacted revenue.
- the overall atmosphere in the world meant people were already taking recessionary measures. Companies were already staring to plateau in growth around this time
- interest rates would increase the next year which impacts everything. But tech would be hit pretty hard itself.
- the Ai hype bubble was starting to take off around this time. It wouldn't affect tech for a while, but it would slowly start this pivtot to try and push this as a marketing gimmick and shift priorities. And in a few cases, companies start to get this genius idea that this very premature tech can replace programmers.
A lot of stuff just happened all at once. S174 alone wouldn't have caused such a downturn by itself if companies thought they could still profit at the end of thr day.
- 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.
Oh, you actually are just straight-up lying, or purposefully wallowing in ignorance.
Here, read this so you can’t play this game where you pretend not to know that this is true.
https://sensiba.com/resources/insights/protecting-qualified-...
Wow. I know I shouldn't reply, but:
1) That's about QSBS, not income tax.
2) QSBS is only relevant should your equity be liquid (i.e. IPO, sale, etc.) in the distant future (there's a 5-year holding period).
3) QSBS is only applicable to a fraction of startups anyway.
See, you started off lying by pretending this isn’t actually affecting any businesses who doesn’t already make a ton of money (yes, I know you tried to slip by simply by saying “revenue” instead of “profit” as if that’s not the entire topic of discussion here).
Then you continued to lie by saying that the real world effects, which have been reported on plenty, simply don’t exist and are “wild assertions”.
I proved you wrong by showing how small businesses can lose an incredible benefit because this tax code change disqualifies many who SHOULDN’T be DQ’d, and now you’re lying by saying that this change, which is about making formerly tax-deductible things no longer tax-deductible and thus pushing you into scenarios where you have six figure tax bills, doesn’t count because nobody is REALLY talking about how qualified small businesses no longer can consider their QSB stock sales as tax deductible, thereby pushing them into a tax bracket where they might get a six figure tax bill.
Or, as I said previously, you’re still just ignorant and the source I provided was simply to esoteric to understand.
It's not having a wide effect on the industry as a whole right now, but it's creating a huge problem in the startup pipeline that will be apparent in 3-5 years. It's effectively strangling anyone who wants to bootstrap a startup.
Obviously industry trends are multivariate, but the way you're talking about this seems to indicate you are seriously disconnected from the finance side of tech startups. This is squeezing a very specific part of the startup pipeline, the transition stage of going from founder-led development to first engineer hires. It makes it much more capital intensive to make that jump because of Section 174. It's scaring away potential founders and making existing early stage startups go slower.
This may hold true for "moonshot" startups, but the tax would still devastate "small-business"/"lifestyle" startups, where cost ~= revenue.
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.
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.
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.
This is the new normal, like the legal industry 20 years ago
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.
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.
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.
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
ok i'm slow today, but reading this phrase... was the nasty effect of this change a one-time thing then?
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-...
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.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?
Also, this penalizes companies for hiring doesn’t it?
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.
I’m not sure what you mean by saying that hiring r&d will be treated as other forms of capital investment.
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.