Little gems like this are just vestige of an obviously dysfunctional system of revenue. They’ll never get the details right because the premise is wrong to begin with.
It seems to me that the tax system is budget-negative for the US federal government. If we say that the budget is sustainable when the ratio of spending to GDP decreases year-over-year, then the only thing that matters is that economic growth is greater than inflation plus the cost of financing. Elimination of the tax system would imply an immediate economic expansion, and much better allocation of resources toward growth. We’re already quite far from ever thinking that we will fund the government with tax revenues, and the side effect of ongoing multi-trillion-dollar bond issuance is learning that tax revenues are probably irrelevant. So let’s just drop taxes and manage the budget in accordance with interest rate stability.
JamesBarney
Imagine the government printed 4.44 trillion dollars and passed twice the total covid stimulus every year. We'd either have massive inflation or the fed would need to jack up interest rates to the 20-40%. Economies don't do well with exploding inflation or sky high interest rates.
jl2718
I would have thought so too. Then I looked at the data.
In the first 11 months of 2023, the treasury ‘printed’ $22.7 Trillion. Tax revenue is about 10% of cash flow.
Taxes are also a soft power, levered to accomplish things without the direct threat of violence. Not sure it's worked out so well in practice, but that is the argument.
iraqmtpizza(dead)
[flagged]
rayiner
It’s a basic premise of MMT that you need taxes to take money out of the economy to check inflation.
tptacek
OK, but MMT is a fringe theory.
dctoedt
> MMT is a fringe theory.
MMT makes intuitive sense as long as you keep in mind its predicate assumptions: 1) The government borrows in the currency that it issues (dollars, pounds, yen), thus the goverment can inject more money into the economy at will — thus increasing "consumer" demand for goods and services; AND 2) there's enough slack productive capacity in the economy to meet the increased demand without causing price inflation.
Stephanie Kelton's book, The Deficit Myth, was a good read.
Disclaimer: I'm unburdened by any formal economics training at all (apart from what I picked up from antitrust law).
Quaere whether MMT critics are like Ptolemaic geocentric astronomers criticizing the Copernican / Keplerian model ....
addicted
MMT forgets that people won’t lend to the govt if the government is going around telling everyone the way they intend on paying the borrowers back is by making the currency they borrowed in worthless.
MMT can only work in a world where the government is explicitly not doing MMT. The moment the government makes MMT official policy no one is gonna lend to that government.
dctoedt
> MMT forgets that people won’t lend to the govt if the government is going around telling everyone the way they intend on paying the borrowers back is by making the currency they borrowed in worthless. ... The moment the government makes MMT official policy no one is gonna lend to that government.
Your premise about the currency becoming worthless is not self-evident. MMT's explicit predicate suggests the currency won't become worthless: MMT assumes there is enough slack productive capacity in the economy — or that additional capacity will be added — to accommodate the increase in demand from the additional money in the system. When that's the case, prices shouldn't rise unacceptably.
MMT makes intuitive sense, but right now we're all just speculating how the populace (and the bond market) would react to it. We also don't know whether the government has enough "instrumentation and control" to be able to manage it effectively.
tptacek
There's probably a better word that captures "fringe" without implying a value judgement (though: I'm not a fan) --- I'd just say, MMT was never operationalized in this administration (Janet Yellen is not an MMT-er).
What you do see is partisan claims that any kind of overspending represents "MMT", which is of course a transparently silly argument.
JamesBarney
If the government borrows and slack remains in the economy, standard economic theory also predicts limited effects on inflation. What about MMT is different?
The two concerns that standard economics seems to have around the government borrowing excess money is higher debt load, and crowding out.
digdugdirk
MMT likely leans heavier on both levers than you're imagining. Heavy government investment until there's no more productive capacity. Extra emphasis on the "productive" part. Picture the New Deal as a baseline, and add on whatever useful projects you can imagine.
The intuitive idea is to maximize human capital by investment in infrastructure, health, and education. Spend money in areas where the return to the country is exponentially improved over time.
As a extreme example - imagine if the government paid for high speed wireless data plans and ensured access for a poor rural community without internet access. It wouldn't be unreasonable to imagine a handful of people in that community find ways to generate income using that internet connection and therefore now are paying more in tax after year 1. At that point, it's just a math problem to argue about what should count as "value" in the equation.
encoderer
Yes absolutely. People who call this is death sentence; well that’s a bit dramatic. The corporate tax rate is 20% so what this is really doing is making every employee 20% more expensive.
If headcount stays stable eventually you go back to your 2021 taxes. If you keep growing, you keep feeling the pain.
That said, this is absolutely insane and I sincerely hope congress fixes it. Small companies are definitely squeezing raises, laying off and changing hiring plans.
gamblor956
Thats...not how income taxes work. Companies still get the same deduction for R&D wages, they just take them over time instead of all at once.
You can thank FAANG for its abuses of the R&D deduction for these changes.
encoderer
You just said the exact same thing I said. What part are you confused about? The part about if you keep growing you keep feeling the pain?
Since you mention it — this has nothing to do with fang and was entirely about “paying for” trumps 2017 business tax cut as it was scored by the cbo. As a tax attorney I’m sure you realize the section 174 changes impact business activities beyond what’s allowed under the r&d tax credit.
I’ll be candid, your brevity and snark sort of make you look like an ahole here.
gamblor956
My last paragraph is a direct response to your claim that the 174 changes are "insane" by pointing out that the changes are not insane and are directly instigated by tech's abuse of tax rules (of which section 174 was just one abuse; see also IP migrations, double-dutch structures, etc.)
While the section 174 changes also effect other industries that embraced tech-style accounting (mostly biotech), they generally had minimal impact on other industries because most other industries already capitalized IP derived from R&D...which is why there hasn't been any impetus to eliminate this change.
And quite frankly, many of my non-tech clients were pretty happy that the playing field was finally leveled for tech companies. The abuse of the R&D loophole let tech companies invade other industries for the worse.
I’ll be candid, your brevity and snark sort of make you look like an ahole here.
Brevity is a virtue. And your response was snarkier and ruder than my reply to your comment.
JamesBarney
Most FAANG's are fine since their profitable and have access to cash. The real hit is startups, especially smaller or bootstrapped ones which will now have a much higher tax bill.
ganoushoreilly
Exactly, all this does is disproportionately affect smaller firms. This was by design.
okdood64
Exactly.
encoderer
Exactly.
pgruenbacher
This absolutely impacted my previous job at 100-150 employee company where everyone was either a dev or researcher. They had to do a hiring freeze.
Paul-Craft
Now that I consider the timing, I wonder if this didn't contribute to me getting laid off in April.
Am I confused or after 5 years is this essentially a wash? E.g. previously in year 1 if I had one dev earning $100k I could deduct $100k from my revenue and pay taxes on the remainder. Now I need to spread that over 5 years. Thus if this dev kept their income at $100k (to make the math easy) I would write off $20k in year 1, $40k in year 2, $60k in year 3, etc. After 5 years we are back to what taxes were previously...
Tostino
For a small business, floating the difference for that extra time period can be painful.
sinuhe69
But the dev don’t work in a year. So you have to depreciate his next year salary and so forth, right? It’s insane!
addicted
This article ignores what’s likely the root cause of no one raising a stink about this change.
Because this change helps existing companies relative to companies that don’t already exist.
Since the beneficiaries already exist they have an incentive to protect this change, whereas the people who suffer from this, ie future founders, don’t already exist so they cannot protest it.
mountainriver
This tax was blatantly a shot at CA and NY tech companies from the maga crowd.
Also worth noting that Section 41 offers credits for R&D which helps offset this.
The latest debt ceiling bill has a fix for this, and if that doesn’t go through there are bills in the house and senate to rewind this.
mariya12
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HannahFox(dead)
[dead]
happytiger
Obviously. This is a regressive tax (meaning it targets a larger percentage of income from lower-income groups than from high-income groups, as in employees not owners of equity) that should be repealed as it directly makes American companies uncompetitive and is against the Interest of everyday people. You should have incentives to take the risk of starting a company and employing engineers / people not disincentives. Small businesses are the majority of jobs and this is directly impacting their ability to put money in people’s pockets and the number of jobs available.
JamesBarney
I don't think it's regressive the average engineers makes far more than the average person. But it is a terrible idea because it strangles new technology companies which hurt growth in the long term.
happytiger
Compare the average engineer to ownership and executive compensation and salaries my friend. Just because many engineers make more than average wages doesn’t mean they are compensated like owners and other senior level compensation packages… there is a massive gap.
Just look at the compensation gap between CEOs and software engineers:
I know people on HN like to think of FAANG salaries when they think of software engineers, but the vast majority get nothing close to that. And they are firmly in the “worker” category of salary ranges.
46 of 50 states have regressive taxation policies favoring the rich, and this taxation system is definitely regressive as it’s killing startups and small business’s ability to hire software developers by creating a tax punishment for doing so: a literal regressive tax as it punishes the working classes while favoring the upper classes (its definition).
Poverty can look like raising a family as a single parent on a software engineering 91k average US salary in a place like NYC (when the CEO of the company you work for makes 30M a year). It’s not always Federal poverty levels that count.
I know it’s easy to dismiss this point of view as political, but that’s not my intention. It’s important that people realize how unequal even software jobs have become.
addicted
This is not an income tax. Employees aren’t getting taxed.
This is quite literally a tax on owners, so even by your definition this is the opposite of a regressive tax.
What this tax does do is heavily benefits incumbents over new entrants. It heavily benefits those that are already rolling in profits over those who are about to turn a loss into a profit because where it really hurts is in the margins.
Companies that have been around for a while may suffer for a couple of years as the tax is just introduced, but a few years later they will start reaping the benefits as they get tax credits from the past year.
But companies that are new will suffer at the worst possible time, right when they’re about to prove the viability of their business.
JamesBarney
I guess it's how you define regressive. Is the following tax regressive or progressive?
top 1%: 5%
top 2-50%: 20%
bottom 50%: 0%
happytiger
No, it’s the opposite. The term regressive tax refers to a tax that is applied uniformly regardless of income. Regressive taxes take a larger percentage of income from low-income earners than from middle-and high-income earners.
One of the main purposes of section 174 is to help foster “research or experimental expenditures”. However, the new section 174 rules are actively discouraging and effectively penalizing companies for incurring these costs because of the significant tax increase they may face as a result.
So it’s the employees who are losing their jobs due to the tax, directly. It impacts those who are working for an hourly wage, not the owners. You could argue that the owners have a shoe in the game because they can hire fewer people, which is true, but it’s actually killing software engineering jobs and it’s the penalty to employment that makes it regressive. It’s evenly applied but the effect is uneven. A regressive tax takes a higher proportion of earnings from lower-income households than those with higher incomes… that’s my point.
The top income earners don’t get hit by tax changes killing their positions, so the real threshold is whether someone is getting paid a salary or not. It deeply impacts salaried employees, not owners. Owners just have one fewer employee. That software engineer is out of a job. And it’s happening at scale and having a much larger impact than I think a lot of people realize.
Hope that makes more sense. I’m sorry if I was unclear. It’s been a day my friend… :)
It seems to me that the tax system is budget-negative for the US federal government. If we say that the budget is sustainable when the ratio of spending to GDP decreases year-over-year, then the only thing that matters is that economic growth is greater than inflation plus the cost of financing. Elimination of the tax system would imply an immediate economic expansion, and much better allocation of resources toward growth. We’re already quite far from ever thinking that we will fund the government with tax revenues, and the side effect of ongoing multi-trillion-dollar bond issuance is learning that tax revenues are probably irrelevant. So let’s just drop taxes and manage the budget in accordance with interest rate stability.
In the first 11 months of 2023, the treasury ‘printed’ $22.7 Trillion. Tax revenue is about 10% of cash flow.
https://www.sifma.org/resources/research/us-treasury-securit...
MMT makes intuitive sense as long as you keep in mind its predicate assumptions: 1) The government borrows in the currency that it issues (dollars, pounds, yen), thus the goverment can inject more money into the economy at will — thus increasing "consumer" demand for goods and services; AND 2) there's enough slack productive capacity in the economy to meet the increased demand without causing price inflation.
Stephanie Kelton's book, The Deficit Myth, was a good read.
Disclaimer: I'm unburdened by any formal economics training at all (apart from what I picked up from antitrust law).
Quaere whether MMT critics are like Ptolemaic geocentric astronomers criticizing the Copernican / Keplerian model ....
MMT can only work in a world where the government is explicitly not doing MMT. The moment the government makes MMT official policy no one is gonna lend to that government.
Your premise about the currency becoming worthless is not self-evident. MMT's explicit predicate suggests the currency won't become worthless: MMT assumes there is enough slack productive capacity in the economy — or that additional capacity will be added — to accommodate the increase in demand from the additional money in the system. When that's the case, prices shouldn't rise unacceptably.
MMT makes intuitive sense, but right now we're all just speculating how the populace (and the bond market) would react to it. We also don't know whether the government has enough "instrumentation and control" to be able to manage it effectively.
What you do see is partisan claims that any kind of overspending represents "MMT", which is of course a transparently silly argument.
The two concerns that standard economics seems to have around the government borrowing excess money is higher debt load, and crowding out.
The intuitive idea is to maximize human capital by investment in infrastructure, health, and education. Spend money in areas where the return to the country is exponentially improved over time.
As a extreme example - imagine if the government paid for high speed wireless data plans and ensured access for a poor rural community without internet access. It wouldn't be unreasonable to imagine a handful of people in that community find ways to generate income using that internet connection and therefore now are paying more in tax after year 1. At that point, it's just a math problem to argue about what should count as "value" in the equation.
If headcount stays stable eventually you go back to your 2021 taxes. If you keep growing, you keep feeling the pain.
That said, this is absolutely insane and I sincerely hope congress fixes it. Small companies are definitely squeezing raises, laying off and changing hiring plans.
You can thank FAANG for its abuses of the R&D deduction for these changes.
Since you mention it — this has nothing to do with fang and was entirely about “paying for” trumps 2017 business tax cut as it was scored by the cbo. As a tax attorney I’m sure you realize the section 174 changes impact business activities beyond what’s allowed under the r&d tax credit.
I’ll be candid, your brevity and snark sort of make you look like an ahole here.
While the section 174 changes also effect other industries that embraced tech-style accounting (mostly biotech), they generally had minimal impact on other industries because most other industries already capitalized IP derived from R&D...which is why there hasn't been any impetus to eliminate this change.
And quite frankly, many of my non-tech clients were pretty happy that the playing field was finally leveled for tech companies. The abuse of the R&D loophole let tech companies invade other industries for the worse.
I’ll be candid, your brevity and snark sort of make you look like an ahole here.
Brevity is a virtue. And your response was snarkier and ruder than my reply to your comment.
Because this change helps existing companies relative to companies that don’t already exist.
Since the beneficiaries already exist they have an incentive to protect this change, whereas the people who suffer from this, ie future founders, don’t already exist so they cannot protest it.
Also worth noting that Section 41 offers credits for R&D which helps offset this.
The latest debt ceiling bill has a fix for this, and if that doesn’t go through there are bills in the house and senate to rewind this.
Just look at the compensation gap between CEOs and software engineers:
https://www.dice.com/career-advice/income-gap-tech-ceos-soft...
I know people on HN like to think of FAANG salaries when they think of software engineers, but the vast majority get nothing close to that. And they are firmly in the “worker” category of salary ranges.
46 of 50 states have regressive taxation policies favoring the rich, and this taxation system is definitely regressive as it’s killing startups and small business’s ability to hire software developers by creating a tax punishment for doing so: a literal regressive tax as it punishes the working classes while favoring the upper classes (its definition).
https://itep.org/whopays-7th-edition/#:~:text=46%20states%20....
Poverty can look like raising a family as a single parent on a software engineering 91k average US salary in a place like NYC (when the CEO of the company you work for makes 30M a year). It’s not always Federal poverty levels that count.
I know it’s easy to dismiss this point of view as political, but that’s not my intention. It’s important that people realize how unequal even software jobs have become.
This is quite literally a tax on owners, so even by your definition this is the opposite of a regressive tax.
What this tax does do is heavily benefits incumbents over new entrants. It heavily benefits those that are already rolling in profits over those who are about to turn a loss into a profit because where it really hurts is in the margins.
Companies that have been around for a while may suffer for a couple of years as the tax is just introduced, but a few years later they will start reaping the benefits as they get tax credits from the past year.
But companies that are new will suffer at the worst possible time, right when they’re about to prove the viability of their business.
One of the main purposes of section 174 is to help foster “research or experimental expenditures”. However, the new section 174 rules are actively discouraging and effectively penalizing companies for incurring these costs because of the significant tax increase they may face as a result.
So it’s the employees who are losing their jobs due to the tax, directly. It impacts those who are working for an hourly wage, not the owners. You could argue that the owners have a shoe in the game because they can hire fewer people, which is true, but it’s actually killing software engineering jobs and it’s the penalty to employment that makes it regressive. It’s evenly applied but the effect is uneven. A regressive tax takes a higher proportion of earnings from lower-income households than those with higher incomes… that’s my point.
The top income earners don’t get hit by tax changes killing their positions, so the real threshold is whether someone is getting paid a salary or not. It deeply impacts salaried employees, not owners. Owners just have one fewer employee. That software engineer is out of a job. And it’s happening at scale and having a much larger impact than I think a lot of people realize.
Hope that makes more sense. I’m sorry if I was unclear. It’s been a day my friend… :)