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Mass tech layoffs from 2022 onward linked to US tax code change by first Donald Trump administration
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- Title
- The hidden time bomb in the tax code that's fueling mass tech layoffs
- Word count
- 2037 words
I remember putting together a paper in my undergrad discussing the causes and impacts of this specific tax change back in early 2023.
This wasn’t some government sabotage in case Trump lost. Often, to pass big spending bills like the one this tax change was a part of, the government will do some truly idiotic things.
This change was delibrately meant to shift taxes from 2024-2027 to 2022 and 2023, to justify additional spending in the latter years. Obviously, this doesn’t make sense. Government spending is government spending, regardless of the year it happens in. And the layoffs were an obvious knockon effect that would cause a decrease in government revenue.
The “plan” is for the government to “figure this out” the year before the tax change is actually implemented, and undo it for all the above reasons. Of course, at this point most of the spending is already allocated and cannot be easily undone, so the only reasonable solution is to spend it on debt.
It’s this kind of political gamesmanship that causes continued government deficits despite pledges to bring those balances under control. It’s not that the government has faith in modern monetary theory, but they would rather give the next guy no choice than actually do long-term economic planning.
However, in a textbook case of government incompetence, there was a plan in place to undo the tax change, and the government missed the deadline like a forgetful university student turning in a paper.
I’m not kidding; if I remember correctly, they passed the bill that undid it a few hours after the tax change was codified into law for the next 5 years.Edit: See comment below; the Build Back Better bill which included that provision was never passed.
To be clear, blaming this tax change on tech layoffs in general is a smokescreen. Remember, this isn’t a tax increase but a shift in tax amortization. Any company with a strong revenue stream can prepare for this on their tax forms by shifting money around. Tech companies may have used this as a culprit, but it was really the shift in interest rates that made companies go lean.
This did impact startups and mid-size companies, who are barely covering or losing money on employees. Some VC money and tech investment went to Canada and Europe when it would have gone to the U.S. otherwise. Those jobs moved as well. Pretty much strictly, it’s a negative change.
Could you elaborate on which reversal bill you're referring to? Per the original article, this tax change still hasn't been rolled back. The fix is still a work-in-progress: https://www.kbkg.com/feature/lawmakers-introduce-bill-to-retroactively-fix-rd-174-expensing
Oh, thanks for checking me on this! I did remember incorrectly.
The bill in question was the Build Back Better bill, but that was never passed. Joe Manchin kept flip-flopping. I probably remembered reading a publication saying that there was an early January vote that was expected to pass, but that it wouldn’t actually change Section 174.
That’s because the Build Back Better act didn’t undo the Section 174 changes, it delayed the activation date to 2025. If passed in 2021, that provision would have at least stalled the changes, and if passed in 2022, it would have done nothing (or presumably, that provision would have needed to be rewritten like they are doing now in the article you linked).
However, the Build Back Better bill was never passed.
I’m in the tech industry and the startup I worked for went under because of this change and now I have to work at the sort of big multinational corp I was trying to avoid cause startups cant hire.
With that being said, is this not what “the people” wanted? For corps to pay more taxes?
Sadly, large corps will pay the same amount of taxes because they'll make it to end of Year 5 where they'll have finished deducting that salary. It's only small companies like yours that fold before they can recollect what they paid.
Crucially, this accelerates oligarchy by further monopolizing the market.
BBBBBBINGO!
The large corporations could absorb this whereas startups get eaten alive—unless they are absurdly well funded.
Ok, so it was really tax code + interest rates (my personal bugbear of voice) + COVID over-hiring.
The third one: the executives deserve the blame for that
The second one: it's economics. How does anyone even know?
The first one: In the bigger corporations, wouldn't the CFOs and accountants have been warning execs (iOS originally corrected to "excess". Late stage capitalism, anyone) in advance?
Seems likely corporations knew they would likely be firing tons of people come 2022 yet hired anyway. Capitalism at its finest.
Most of the big corps were lobbying extremely hard and expected this tax change to be rolled back because it would decimate hiring and employment in tech. Lo and behold, Trump and Republicans told them to pound sand, so here we are.
Yes, this is well discussed in Hacker news. OP summarizes it well. It was another example of a time bomb trump put in in case he lost, and sadly no one bothered to ubtick it in the first 2 years of Biden's term. On top of interest rates soaring, S174 basicslly ended the "free money" era of tech.
Not quite sure how to feel on a macro level. One hand hand, this tax code clearly paid off in spades as tech innovation completely supercharged the US. But on the other it is a bit absurd that a tax code can let you write off all employee labor to begin with. And it's not like the tech companies used those funds well, outside of paying workers well. We definitely need a proper tax reform.
At least with tech, compared to other industries many displaced workers can still manage to potentially make impact in smaller settings, maybe even making their own thing on the side. These layoffs definitely made me realize I want to be independent in the long term of my career, rather than specialize in a niche professional aspect.
I don't see why you shouldn't be able to write off all expenses.
Further, they already pay taxes on the employee wages via FUTA+SUTA.
All of them f, though? Especially when it's writing off a person who is also paying taxes. It just seems backwards in my mind. That seems like something you only do when you want to promote humanitarian efforts and that human cost exceeds anything the government can get from the person/organization. I.E. Charities.
Tech can clearly make money, in comparison. I don't see why they can write off everything from their bugged expense
Normally businesses are taxed on profits, not revenue. Profits are revenue minus expenses. Labor is an expense like anything else. Any expense results in the business having less money that could be used to pay taxes.
Some expenses, like buying a building, are written off over many years because the idea is that the benefit of having that building is also over many years. That works out because buildings are often paid for using a mortgage.
Labor isn't normally like that. The benefit of the work the employee does happens immediately, and the work done doesn't create an asset that can be used as collateral to borrow money.
So the weird thing with this rule is treating software as a durable asset like a building. But you can't normally get a loan based on that.
This will have worse effects on businesses that don't have positive cashflow.
The talent itself should be the collateral. It's a shame we can value a building in the US but not a person. Especially when labor laws mean they can just let go of it on a whim. That's sort of how it works with tech, but tech has a lot of private funding as of late. When you put it this way, it's not wonder everyone in tech sold off to private equity instead.
I will happily say that this was the huge problem with Tech in the 2010's. Too much borrowing with intent to market capture instead of figure out a sustainable business model. S174 was unfortunate, but part of that fall was entirely on companies happy to coast on borrowing instead of making a long term plan to survive. Which admittedly, part of was due to how CEO incentives work.
It's all a huge flawed system in need of reform.
It might not be obvious at first, but this idea of valuing people as collateral assets is contrary to freedom and human rights. The talent walks out the door every evening. A bank can’t repossess people. If the business goes bankrupt, the employees are going to find another job, if they can.
(Though of course, historically, slaves were considered assets.)
There are ways to kind of finesse this with stock options. For example, when a startup gets bought out, employees might get options that are only worth something if they stay a year or two. But ultimately, they can still walk.
We could do both. We simply choose to distinguish human value and call it "respect". And yeah, human workers seem to be less and less respected by the day.
Even then, we do value people on a daily basis. A key actor leaves a movie and it's chaos. An athlete needs a break or gets suspended and the value of the team erodes. It's not a new concept per se.
Exactly. You can't predict all dramas, and sometimes things don't work out at all. Just like buying a building in 2019 or investing in NFTs. but if your talent walks out because you screwed them out of a mere $10,000 pay raise, maybe you should be socially shamed for that blunder. In the end, most people simply want respect and to feel like they are contributing. It's not a science, but it's also not that complicated.
I know I'm mostly talking in ideals but I think around 2023-2024 we definitely hit some boiling point in our labor. This can't just be solved with small raises and simple platitudes right now. We need a whole social reform on how we think of labor if America ever wants to be a power house again.
But we don't put dollar values on most humans. Companies may have insurance policies for major movers and shakers with a unique value, but how are you going fairly evaluate the dollar value of every person in a company? Is Sarah in accounting worth more than Jiang in sales?
The simple, fair abstraction countries typically use for tax liability is salary since that's an objective number that're easy to verify.
De jure, no. DE facto: we absolutely do. Even outside of life insurance, we base it on their salary, line of work, credit score, and more. It's definitely not a holistic value, but it's soke form of metric given.
I wasn't making any crazy judgement call with my suggestion. I just wished proper, regulated banking systems had a bit more judgement on lending money than "do you have high credit score or already rich?" ideas, experience, and talent should come into play here. Without that, it's no wonder everything is losing out to private equity
How else do you propose lenders identify trustworthy individuals? Lenders already give extra leeway to people with limited credit history, but people with bad credit scores are inherently higher risk because the only way you get a bad credit score is by having a bad credit history.
It's already taxed - why double tax?
Big tech can absorb this as they can handle the adjustment to writing off the cost over the course of 5 years. This improportionately hurts startups and small businesses.
I assume there's multiple categories of taxes? Employees are taxed on income and business taxed on various other aspects. It'll come down to which tax is more valuable to collect.
I am more than fine with setting a threshold for business size with such stuff, as many labor regulations do. 50 tends to be that number IIRC. There very much should be different rules for meta compared to some scrappy startup getting off the ground.
Offtopic/noise
Disproportionately?
Call me the modern Shakespeare.
If labor shouldn't be write-off-able, then more labor classes than software engineers should be affected. And as it is right now, 100% of a software engineer's salary can be written off, but over a timespan of 5 years instead of 1 year. It sounds like you're advocating for a percentage of salary that can't be written off, but this doesn't accomplish that. Sorry I misunderstood you.
I'm fine with some write-offs, it's a great way to encourage job creation. I'm not so sure if all the labor cost should be written off, though.
Yes. Which I find perplexing. Is there any other for profit industry where you can do this? I'm no business expert, so my naivete may be showing.
I think the idea is that taxing an unprofitable business makes no sense. Imagine I hire someone to build me a product. I pay them 100k for a year. The product only sells 30k in revenue the whole year. I lost 70k and have to fire my one employee :( Now the government comes and says "hey you lost 70k overall, but I'm going to tax you on 10k of revenue anyway". 10k because 30k minus the 20k I could deduct in Year 1.
That does seem to be how they tax people who aren't on W-2's though where they take taxes before you even get the paycheck). I worked freelance 2024, I basically spent all my money and had to dip into savings a bit just to maintain rent, utilities, and food. Come tax season and I still need to pay some 20% to the feds that I clearly don't have. So I go from barely floating to deep into debt. I couldn't write off my rent as an expense, apparently.
Are either situation "fair"? What I would have been told is that I should have put aside 20% in preparation (which I clearly did not have). Would I be unreasonable suggesting he same to this one employee business?
As a bonus: my tax auditor did actually recommend me spinning up a "company" to potentially reduce my taxes for next year. So it very much is two different playing fields.
Thought exercise aside, I am more than fine with some threshold on company size before this stuff kicks in to prevent this situation. A company with one employee is not the same as a multi national conglomerate.
I'm not the most well-versed in self employment taxation. I understand there's some things that are unfair, like you pay into unemployment but are not allowed to receive it? However, you're conflating a few things. My employer can't deduct my rent either! And as a self employed worker, you get to deduct some expenses that I don't get to deduct. Your dollar for my dollar, you pay more in taxes. But in theory, all else equal, you should have more dollars given that there's no corporation also taking a cut.
u/raze2012 I fumbled the reply and subsequent copy and paste, so typing again:
A better model would be to tax profitable companies more, instead of finding new ways to tax unprofitable companies. If my company made $50 million in profit but had 10 employees, why should it pay less in taxes than a company that made $50 million in profit but had 10000 employees?
Well yes, thars the issue. All things are never equal. Not between a laid off tech dude in a washed market trying to survive and a business starter who likely had reserves on hand before making the leap. I didn't necessarily choose nor prepare for this path the way a businessperson should.
(on a tangent: I really do hate the advice of "you should start your own business!" as a way to get out of a situation where you are losing money. That's something. You spend years preparing from, securing funds, etc.)
If you were a freelancer, you needed to be putting aside savings to deal with income tax payments that employees have automatically withheld from their pay each month, and you could have written off any expenses against your revenue. Functionally, you were operating just like a corporation. In that your labor was free, your net profit was high.
Thanks for proving my point. I literally could not, and I did try to write off expenses when tax season came. Fact is there wasn't much to write off in 2024 for me as someone simply using my 2021 laptop with software licensed by my contractor.
unlike a corporation, I could not write off my rent, living expenses, nor emergencies as business expenses. But that's probably why I was advised to start up a company to have that ability.
I don't plan to stay like this long term, so I'd rather avoid the $800 licensing fee to do that.
Yeah, even if you had a corporation you wouldn't be able to write off rent, living expenses, nor emergencies as business expenses. You could write off your business expenses, but even if the only thing you were selling was your labor, your housing for the person doing the work wouldn't be deductible (at least in the USA) unless your corporation owned your house, and rented it to you at fair market value. At which point your corporation would be liable for the income tax for that rent to the degree it exceeded expenses and round and round it goes. At the small end for a labor-based company with one person a corporation is mostly a liability hedge, not a way to reduce taxes.
Maybe ask your tax accountant about the home office tax deduction.
Was the question if there's any other (non-software) for-profit businesses where you can deduct salaries? If so, yes, generally salaries are deducted. Software engineers' salaries deducting over 5 years is the outlier. Everyone else deducts in 1 year. Maybe there's another outlier or two but in general, 1 year.
Edit: I am learning that in Texas, the state taxes on gross revenue. So not always true!
I see. Thank you. I didn't realize it was the norm, so I guess this really was just a hail Mary compromise to pass the 2017 version of the "big beautiful bill". I wonder what other tax hike will potentially need to be taken to get the latter bill passed (from what I read, it's not going to pass as is).
Wages are not all of the labor cost though. There's also costs associated with licensing systems to manage the organization (staffbase, SAP, UKG type systems) and process payroll (ADP the most popular) as well as benefits and 401K costs. Many of these systems are licensed per individual you expect to employ. I don't know if those can/should be written off but just mean to say labor costs include much more than wages paid.
The rule of thumb I've heard is, for most office jobs you usually get half your cost in wages and half in benefits. Health care being the major driver, of course.
Quite a bit of perspective to get early in my career. Realizing those idiots were paying me double what I thought they were, and I don't even know what I'm doing!