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The 2022 drop for SWE is easy for me to explain, and it's not on these analysts' list of factors (though I'm not an economic quant, I don't know how you could r

by advael 1y ago

The 2022 drop for SWE is easy for me to explain, and it's not on these analysts' list of factors (though I'm not an economic quant, I don't know how you could really control for it): In 2017, a tax bill was passed that cut a particular tax incentive in 2022 in an effort to be counted as "revenue neutral" despite being otherwise a massive tax cut overall. The incentive in question was a writeoff for "Research and development". This means that in 2022, it got effectively much more expensive to hire anyone who falls under that category, including developers not directly necessary for the day-to-day function of a business (hell, one might argue they would have counted anyway) and scientists of most kinds. That this hit big firms, which have a higher relative amount of R&D efforts going at a given time, first makes a lot of sense. For customer service, my explanation is that companies literally do not care about customer service. Automated phone trees, outsourced call centers whose reps have no real power to help a customer, and poorly-made websites have been frustrating people for decades, but businesses never seem to try to compete on doing better at it. It's a cheap win with investors who want to hear about AI initiatives to lay off yet even more of this department, because it doesn't matter if the quality of service declines, there are no market or regulatory forces that are punishing this well enough to ever expect firms to stop breaking it, let alone fix it

TuringNYC 1y ago
Love this note. For those interested, this is the Tax Cuts and Jobs Act (TCJA) of 2017 Section 179. For a software engineering business, the Tax Cuts and Jobs Act (TCJA) of 2017 significantly impacted how software costs can be expensed under Section 179. While Section 179 previously allowed for the immediate expensing of many software purchases, TCJA reforms restricted this deduction primarily to "off-the-shelf" software. Custom-developed software and internal development costs are no longer eligible for Section 179 expensing and must now be capitalized and amortized. Under the TCJA, Section 179 cannot be used for software that a company develops for itself. This includes the direct costs for the engineers, programmers, and other personnel involved in the development process. The report not addressing this elephant in the room is a disappointing.
- kevindamm 1y ago
  I think it may have been a one-two punch of §174 and the end of ZIRP. Of note, the OBBB reinstated the ability to deduct R&D, so businesses are no longer required to capitalize and amortize R&D expenses (including software development). https://warrenaverett.com/insights/one-big-beautiful-bill-section-174-research-development/ https://warrenaverett.com/insights/one-big-beautiful-bill-se...
  - deleted 1y ago
    [deleted]
  - lisbbb 1y ago
    I was talking about zirp in another thread and got downvoted. But yes, companies were taking out low/zero interest loans and hiring people in hopes of making 1-2% on it, which worked for awhile. It doesn't work at 4-5%, though. We can't pin our hopes to zirp anyways. But a lot of sketchy activities around investing were accomplished because of zirp.
- silisili 1y ago
  Section 174 was the big one that affected how SE salaries could be deducted, that many blamed for the start of layoffs. However, that's back for tax year 2025, so why aren't we seeing the jobs come back? Maybe it really was 174 then, but AI now?
  - MontyCarloHall 1y ago
    >why aren't we seeing the jobs come back? It was only just reinstated, so it's probably too early to see the effects. I also expect that despite the restoration of Section 174, companies realized that they not only overhired during ZIRP, but also that they don't actually need that headcount, given the outcome of Musk's Twitter layoffs. There were so many prognostications that Twitter would imminently implode after downsizing from ~8k to ~1.5k employees, and when these claims never came to pass, it was a wake-up call to the rest of the industry [0]. [0] https://www.livemint.com/companies/news/elon-musk-fired-80-percent-of-twitter-x-silicon-valley-companies-meta-amazon-google-microsoft-adopted-practice-report-11718252374022.html https://www.livemint.com/companies/news/elon-musk-fired-80-p...
blindriver 1y ago
You absolutely misunderstand Section 174 and you are spreading misinformation. The only companies this affected are those right at the margins of becoming profitable. It doesn't affect new startups and it doesn't affect established businesses. And if you are at the margins of becoming profitable you have likely accumulated more than enough tax credits for all your losses. The changes to Section 174 is not the explanation of why software engineering jobs were lost in 2022. They were lost because every company overhired from 2020-2022 and they have to absorb it given the drop in activity once the Pandemic was over.
- cobbzilla 1y ago
  Not entirely accurate. An unprofitable company that is acquired for its tech or team might have a huge amount of tax credits that they can’t use, but the acquiring company can. This can make an acquisition more attractive, even if the target company never made any money.
  - TuringNYC 1y ago
    You are right that it creates residual value which might be purchased for value (probably at a discount.) However, it doesn't help the startup actually pay the bills while it operates. Historically, the R&D payroll just wiped out same year revenue and you essentially did cash accounting. After Section 174, you had to finance the R&D by borrowing or just hiring less.
  - blindriver 1y ago
    You won’t lose the tax credits they only get time shifted.
    - cobbzilla 1y ago
      I was responding to “The only companies this affected are those right at the margins of becoming profitable.” It also affects wildly unprofitable companies that have burned lots of cash and never made any money. And you do “lose” the tax credits upon acquisition - they’re not only time-shifted, they are company-shifted.
awesome_dude 1y ago
> It's a cheap win with investors who want to hear about AI initiatives to lay off yet even more of this department, because it doesn't matter if the quality of service declines, there are no market or regulatory forces that are punishing this well enough to ever expect firms to stop breaking it, let alone fix it There's also some argument that, if people cannot get customer service to "help" they stop asking for help - driving that cost down. And not having to remedy issues in the product = no repair/replace cost And people are then left with only a few options, one of which... buy a replacement... which in a restricted market is a WIN because more money coming in...
jmyeet 1y ago
I've heard this complaint/observation many times and I just don't buy it. For one thing, particularly for large companies, the deduction smooths out. Yes, you can only deduct 20% of the costs this year but you're also deducting 20% from the previous year, 20% from the eyar before that and so on. Also, the 2017 tax cuts and the recent bill have provided substantial tax cuts to these corporations too. Usually this subject comes up where people (at least on HN) are telling people to mail their Congresspeople and Senators to get a bill passed to "fix" this and my question is always this: "What tax cuts are you going to give back to pay for this?" If we want to end this ridiculous IP transfer to Ireland and royalty payments to offshore profits to avoid taxes at the same time, I'm 100% on board with fixing the deductability of engineering salaries.
- saelthavron 1y ago
  > I'm 100% on board with fixing the deductability of engineering salaries. It's already been fixed for US workers.
- ch4s3 1y ago
  > Also, the 2017 tax cuts and the recent bill have provided substantial tax cuts to these corporations too. That's just not how big companies look at their budgets, it isn't all one big pool of funds coming in and going out everything has a cost center and is accounted for individually end to end. This tax change made certain jobs suddenly 20% more expensive on paper. People in corporate finance look at these numbers and make recommendations that get implemented.
- rurp 1y ago
  > the 2017 tax cuts and the recent bill have provided substantial tax cuts to these corporations too. Sure, but that doesn't necessarily change the marginal cost of hiring another dev if the tax incentives have worsened. The time value of money over 5 years is significant, especially in a fast moving industry like tech. The correlation between this change passing and tech hiring dropping is strong so I'm inclined to think there's some signal there.
another_twist 1y ago
And something to note - this cut has been reinstated as part of the Big Beautiful Bill. Which has passed. I think the drop in jobs between now and a year from now atleast be separated as AI vs just interest rates. There are less confounding variables.
green7ea 1y ago
This 1000x. I was working in Europe for a big American company, which will remain nameless, and they started shutting down most, if not all, of their European operations. A change in the US tax code made software development amortize over 5 years in the US and over 15 years overseas. It was later changed instant deduction in the US but still 15 years for overseas. It no longer makes sense to outsource software development in many cases.
ponector 1y ago
How does US tax bill explain global slowdown?

by advael 1y ago

TuringNYC 1y ago

Love this note. For those interested, this is the Tax Cuts and Jobs Act (TCJA) of 2017 Section 179. For a software engineering business, the Tax Cuts and Jobs Act (TCJA) of 2017 significantly impacted how software costs can be expensed under Section 179. While Section 179 previously allowed for the immediate expensing of many software purchases, TCJA reforms restricted this deduction primarily to "off-the-shelf" software. Custom-developed software and internal development costs are no longer eligible for Section 179 expensing and must now be capitalized and amortized. Under the TCJA, Section 179 cannot be used for software that a company develops for itself. This includes the direct costs for the engineers, programmers, and other personnel involved in the development process. The report not addressing this elephant in the room is a disappointing.

kevindamm 1y ago
I think it may have been a one-two punch of §174 and the end of ZIRP. Of note, the OBBB reinstated the ability to deduct R&D, so businesses are no longer required to capitalize and amortize R&D expenses (including software development). https://warrenaverett.com/insights/one-big-beautiful-bill-section-174-research-development/ https://warrenaverett.com/insights/one-big-beautiful-bill-se...
- deleted 1y ago
  [deleted]
- lisbbb 1y ago
  I was talking about zirp in another thread and got downvoted. But yes, companies were taking out low/zero interest loans and hiring people in hopes of making 1-2% on it, which worked for awhile. It doesn't work at 4-5%, though. We can't pin our hopes to zirp anyways. But a lot of sketchy activities around investing were accomplished because of zirp.
silisili 1y ago
Section 174 was the big one that affected how SE salaries could be deducted, that many blamed for the start of layoffs. However, that's back for tax year 2025, so why aren't we seeing the jobs come back? Maybe it really was 174 then, but AI now?
- MontyCarloHall 1y ago
  >why aren't we seeing the jobs come back? It was only just reinstated, so it's probably too early to see the effects. I also expect that despite the restoration of Section 174, companies realized that they not only overhired during ZIRP, but also that they don't actually need that headcount, given the outcome of Musk's Twitter layoffs. There were so many prognostications that Twitter would imminently implode after downsizing from ~8k to ~1.5k employees, and when these claims never came to pass, it was a wake-up call to the rest of the industry [0]. [0] https://www.livemint.com/companies/news/elon-musk-fired-80-percent-of-twitter-x-silicon-valley-companies-meta-amazon-google-microsoft-adopted-practice-report-11718252374022.html https://www.livemint.com/companies/news/elon-musk-fired-80-p...

blindriver 1y ago

You absolutely misunderstand Section 174 and you are spreading misinformation. The only companies this affected are those right at the margins of becoming profitable. It doesn't affect new startups and it doesn't affect established businesses. And if you are at the margins of becoming profitable you have likely accumulated more than enough tax credits for all your losses. The changes to Section 174 is not the explanation of why software engineering jobs were lost in 2022. They were lost because every company overhired from 2020-2022 and they have to absorb it given the drop in activity once the Pandemic was over.

cobbzilla 1y ago
Not entirely accurate. An unprofitable company that is acquired for its tech or team might have a huge amount of tax credits that they can’t use, but the acquiring company can. This can make an acquisition more attractive, even if the target company never made any money.
- TuringNYC 1y ago
  You are right that it creates residual value which might be purchased for value (probably at a discount.) However, it doesn't help the startup actually pay the bills while it operates. Historically, the R&D payroll just wiped out same year revenue and you essentially did cash accounting. After Section 174, you had to finance the R&D by borrowing or just hiring less.
- blindriver 1y ago
  You won’t lose the tax credits they only get time shifted.
  - cobbzilla 1y ago
    I was responding to “The only companies this affected are those right at the margins of becoming profitable.” It also affects wildly unprofitable companies that have burned lots of cash and never made any money. And you do “lose” the tax credits upon acquisition - they’re not only time-shifted, they are company-shifted.

awesome_dude 1y ago

> It's a cheap win with investors who want to hear about AI initiatives to lay off yet even more of this department, because it doesn't matter if the quality of service declines, there are no market or regulatory forces that are punishing this well enough to ever expect firms to stop breaking it, let alone fix it There's also some argument that, if people cannot get customer service to "help" they stop asking for help - driving that cost down. And not having to remedy issues in the product = no repair/replace cost And people are then left with only a few options, one of which... buy a replacement... which in a restricted market is a WIN because more money coming in...

jmyeet 1y ago

I've heard this complaint/observation many times and I just don't buy it. For one thing, particularly for large companies, the deduction smooths out. Yes, you can only deduct 20% of the costs this year but you're also deducting 20% from the previous year, 20% from the eyar before that and so on. Also, the 2017 tax cuts and the recent bill have provided substantial tax cuts to these corporations too. Usually this subject comes up where people (at least on HN) are telling people to mail their Congresspeople and Senators to get a bill passed to "fix" this and my question is always this: "What tax cuts are you going to give back to pay for this?" If we want to end this ridiculous IP transfer to Ireland and royalty payments to offshore profits to avoid taxes at the same time, I'm 100% on board with fixing the deductability of engineering salaries.

saelthavron 1y ago
> I'm 100% on board with fixing the deductability of engineering salaries. It's already been fixed for US workers.
ch4s3 1y ago
> Also, the 2017 tax cuts and the recent bill have provided substantial tax cuts to these corporations too. That's just not how big companies look at their budgets, it isn't all one big pool of funds coming in and going out everything has a cost center and is accounted for individually end to end. This tax change made certain jobs suddenly 20% more expensive on paper. People in corporate finance look at these numbers and make recommendations that get implemented.
rurp 1y ago
> the 2017 tax cuts and the recent bill have provided substantial tax cuts to these corporations too. Sure, but that doesn't necessarily change the marginal cost of hiring another dev if the tax incentives have worsened. The time value of money over 5 years is significant, especially in a fast moving industry like tech. The correlation between this change passing and tech hiring dropping is strong so I'm inclined to think there's some signal there.

another_twist 1y ago

And something to note - this cut has been reinstated as part of the Big Beautiful Bill. Which has passed. I think the drop in jobs between now and a year from now atleast be separated as AI vs just interest rates. There are less confounding variables.

green7ea 1y ago

This 1000x. I was working in Europe for a big American company, which will remain nameless, and they started shutting down most, if not all, of their European operations. A change in the US tax code made software development amortize over 5 years in the US and over 15 years overseas. It was later changed instant deduction in the US but still 15 years for overseas. It no longer makes sense to outsource software development in many cases.

ponector 1y ago

How does US tax bill explain global slowdown?