He wrote me a prescription; he said “You are depressed
I'm glad you came to see me to get this off your chest
Come back and see me later, next patient please
Send in another victim of industrial disease”
Industrial Disease, Dire Straits
The Google campus doesn’t look as friendly as it used to. (this ia actually from Bartertown in Mad Max 3 - you can see Thunderdome in the middle)
Since the start of 2023, more than half-a-million tech workers have been laid off. This isn’t the impact of COVID, this isn’t a sudden realization that tech workers are under-performing, this isn’t (much) a wave of AI making tech workers more efficient, and the other usual shibboleths like “it was overhiring during the pandemic” or “it’s a wave of H1B workers” or “all knowledge worker jobs are being replaced by LLMs” are only vaguely correct. You could make a pretty reasonable case that it was the end of Zero Interest Rate Policy (ZIRP) and the corresponding impact of cost of capital - that the cost of borrowing went up, thus venture capital became a less attractive investment class than other areas, so less money went to building new companies and it was harder for existing firms to borrow, as investors went elsewhere for better returns. That is correct - and it would have had its impact - though that impact would have basically been the slowdown of new venture backed firms, not layoffs at the Big Tech Giants - and that did in fact happen. (There is definitely a knock-on effect at the Big Tech Giants where a lack of tech startups does bad things to the large parts of the ecosystem - but that effect is not as immediate as it was back in in the 2000 dot com crash.) But there’s a much more immediate bottom line reason.
Section 174 of the Internal Revenue Code governs the tax treatment of research and development (R&D) expenditures. For roughly 70 years, American companies could deduct 100% of “qualified research and development spending” in the year they incurred the costs, and this was generally interpreted pretty liberally. Salaries, software, contractor payments… if it contributed to creating or improving a product, it could be deducted “off the top” of a firm’s taxable income. The deduction was originally codified by Section 174 of the IRS Code of 1954, and under the provision, R&D flourished in the U.S. It gave us the dominance of Bell Labs, Microsoft, Apple, Google, Facebook - pretty much all the US technology booms you’ve lived through unless you’re quire venerable.
So the way these regs are written: These expenditures must be for activities intended to discover information that eliminates uncertainty about the development or improvement of a product. (Kind of open-ended.) Prior to 2022, taxpayers could immediately deduct R&D expenditures in the year they were incurred, providing a significant tax benefit for businesses investing in innovation. Alternatively, taxpayers could capitalize these costs and amortize them over a period (e.g., at least 60 months) if they chose to defer the deduction. But it was pretty rare to do this, because you could directly manage your R&D payroll costs versus income to mitigate the tax hit. And societally, we accepted that - we were investing in growing the American economy.
But, the Tax Cuts and Jobs Act (TCJA) of 2017 amended Section 174, effective for tax years beginning after December 31, 2021. Starting in 2022, R&D expenditures must be capitalized and amortized over 5 years for domestic research (and 15 years for foreign research… which is pretty untenable.) This change eliminated the option to immediately deduct R&D costs, increasing tax liability for companies with significant research budgets in the short term. Even more annoying, amortization begins at the midpoint of the taxable year in which the expenses are incurred, using a straight-line method.
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