by bunnie | 2025-06-08 06:27:55+00:00
The comparison with Jim Beam is misplaced. Both TSMC and Jim Beam already have to amortize their production equipment over several years. I'm not arguing that this should be changed. This is because the primary risk taken in a distillery build-out or a fab build-out is if there is market demand for a known product. It's primarily a business risk, not a research risk. Tax code is a reasonable tool to regulate business risk.

The people this tax code change hurts are those doing basic research. In the context of semiconductors, that would be a company like ASML (except they are Dutch, so they can happily continue their research practices) who took a decades-long bet to build their EUV steppers.

In the case of basic research, one could be spending millions of dollars on hardware prototypes when you know it can't produce any salable product. There's no upside profit to amortize expenses against: it's like building a distillery that you know can't produce a single drop of salable bourbon because you're working out a radical new distillation technique.

In summary: in basic hardware research, one could be spending millions of dollars to put a whole system together just so you can learn how it fails. It's a true "expense", with no path to amortization.

Now, in addition to making the right technical decisions, the tax law changes force the R&D teams to also consider how to amortize their experiments over many years. You now have have pressure from management to do things like stage prototypes and expenses in the right tax year so the company can continue to show a profit for the shareholders. You could argue that the lessons learned are perhaps IP that have "goodwill" value, but now you're opening a can of worms trying to price a fair market value on a negative result, and you're now having senior research staff spend more time arguing with accountants than directing research. You also have to get to that negative result within a tax year - which effectively penalizes any research project that takes more than 12 months to complete.

Same-year 100% deduction of R&D expenses is simple and it reflects the actual nature of basic research risk. Yes, it allows companies to convert short-term windfalls into long-term research gains by converting taxable profits into research projects, but I'd argue that's not actually a bad social policy.

I think US is probably unique among developed nations in having a tax code that punishes basic research; other countries at least allow it to be deducted. Some even allow super-deductions (e.g. you can deduct $2 for every $1 of R&D expense) or the research is explicitly subsidized through grants.

The argument for special treatment of research is that pioneers put their careers on the line to discover new things, so the rest of us can live in risk-free comfort; so, as a collective we give them some reward for taking that risk.

I suppose the counter-argument is that research incentives and subsidies are socialist "market manipulation" and violate the "free market" principle, and thus America is justified in sanctioning and trade warring with the rest of the world that is socializing basic research costs. That's an opinion one is entitled to hold, but we'll have to agree to disagree on that opinion.