Taxation, Tech Employment and Purchasing Power Trends in the West
Understanding some macro-factors that influence our day-to-day condition as tech workers.
In the past 40 years, a surprising trend has emerged in the West: corporate taxes have significantly dropped.
This fact runs counter to the popular narrative that the West is more tax-heavy compared to emerging economies in Asia, UAE, or Eastern Europe. Let's delve into some key facts and implications of this shift.
Here are some important points to consider:
1. While corporate taxes have indeed reduced in the West, they're still often lower in emerging economies.
2. As corporate taxes decreased, income taxes for employees have effectively increased. Even if tax rates remained nominally the same, inflation has pushed more middle-class workers into higher tax brackets. This means you're likely paying the same taxes that someone earning much more would have paid decades ago - essentially, a tax increase for employees.
3. Alongside higher effective taxes, the cost of living has risen dramatically, further reducing purchasing power for the average worker.
So, why are we poorer despite decades of progress and development?
The decrease in corporate taxes has primarily benefited business owners in the West, especially those in growing fields like IT. These business owners have become significantly wealthier than their counterparts from decades ago.
While the West has created substantial wealth in recent decades, this wealth has been largely captured by the richest in society, leaving the middle class and employee class comparatively poorer.
Some fields have been relatively immune to this trend, particularly key specialized employees who have contributed significantly to these profitable businesses. Silicon Valley engineers and their international counterparts are prime examples, often enjoying good pay and strong purchasing power.
However, even these tech workers face challenges:
1. Despite high salaries, they're often poorly rewarded relative to the value they generate.
2. They face very high tax rates.
3. Rising costs of living affect them too, albeit less severely than workers in less profitable fields.
4. Recent shifts in big tech hiring practices have introduced new pressures.
Following COVID-19 and rising interest rates, tech companies have become more cautious with spending. They're cutting excess benefits and perks, demanding more from employees, and increasingly offshoring work.
This trend is driven by the need to remain competitive in a global market. If Western companies don't employ these efficiencies, they risk losing market share to more cost-effective global players, such as Chinese IT corporations.
For now, tech workers in the West are still relatively "safe" and can enjoy good purchasing power, especially if they're highly skilled and comfortable with intense work environments. However, conditions for such workers may become tougher in the future.
To manage this potentially negative trend, tech workers in the West have two main strategies:
1. Transition from employee status to freelancing, accessing more favorable taxation worldwide.
2. Trade off some pay for remote work opportunities, allowing their money to go further in cheaper locations.
Despite these challenges, tech workers will continue to be employed in the West for several reasons:
1. The West remains a large, rich market for products and services.
2. There's an advantage in having employees who personally understand the market they're building for.
3. The West offers stability, which is attractive to business owners.
4. There's an abundance of skilled IT workers in the West, both technically and in terms of communication skills.
It's worth noting that labor unions worldwide have weakened in recent decades, with IT unions historically being particularly weak. This further erodes the leverage that tech workers have in negotiations.
This is precisely why I run my job board and coaching service
To provide tech workers with a private alternative to labor unions and a tool to gain leverage and optimize their situation in the market and the world.
Despite these challenges, I believe that the paths I help engineers navigate remain valid:
1. Big tech positions in Europe
2. Good tech jobs in Switzerland
3. High-paid, geo-arbitraged remote jobs
Each of these paths offers unique advantages and can provide tech workers with strategies to maintain their economic position in an increasingly complex global landscape.
References:
[1] - Historical U.S. Federal Corporate Income Tax Rates & Brackets, 1909-2020
[2] - Federal Corporate Income Tax Rates
[3] - For most U.S. workers, real wages have barely budged in decades
Useful links
Geo-arbitrage makes sense if and only if you are an EU citizen. If you aren't like I am, I'm Ukrainian; in the middle of the interview process, you will be thrown away inevitably with a bunch of “politically correct” responses, regardless of your experience. Or you will be hired by the staffing company, which will cut your compensation twice.