Category Archives: Tax Issues

Antitrust vs Apple

I am not sure I fully agree, but this article is worth consideration.
WSJ 11/24/2018

Technology advances at warp speed these days, but the antitrust bar keeps attempting a switch in time. On Monday the Supreme Court will consider in Apple v. Pepper whether to overturn decades of precedent that supports the digital economy.

A decade ago Apple revolutionized software development and the smartphone with its one-stop application shop where consumers could download games, social media and other applications. Apple assumed overhead functions for developers including protecting intellectual property and intermediating financial transactions. In return, it collects a 30% commission on app purchases.

Apple’s App Store freed developers to innovate and expanded distribution of their products— epitomizing Steve Jobs’s famous axiom that people don’t know what they want until you show it to them. The App Store launched with 500 apps but now has more than two million. Google, Microsoft and others have imitated Apple’s model to the benefit of consumers world-wide.

Yet plaintiff lawyers now want a share of the bounty. A class action on behalf of all App Store purchasers alleges that Apple monopolizes the app market and overcharges consumers by collecting the 30% commission. Plaintiffs are seeking treble damages under the Clayton Act.

The relevant precedent here is the Supreme Court’s landmark 1977 Illinois Brick Co. v. Illinois decision that bars indirect purchasers from bringing antitrust suits for “pass-through costs.” As the Court correctly reasoned, allocating “overcharges” along distribution chains is inordinately complicated, and allowing those who may be indirectly harmed by anti-competitive practices to sue could “‘open the door to duplicative recoveries.’” Since Apple doesn’t create or set the price for apps, it is a distributor. Commissions are “pass-through” costs, and developers don’t uniformly raise their prices 30%. Developers facing intense competition and elastic consumer demand may absorb the full commission, while others may charge consumers more for in-app purchases.

Consumers are indirect purchasers. The direct purchasers who would have standing to sue are app developers, yet they haven’t. Instead they argue in an amicus brief in the current case that the “developerplatform partnership is procompetitive and lowers costs for consumers.” Yet a Ninth Circuit Court of Appeals panel said app purchasers could sue and “whether app developers are direct purchasers of distribution services from Apple in the sense of Illinois Brick makes no difference.” Nor was the panel concerned that allowing lawsuits by both direct and indirect purchasers could result in duplicative damages. Somehow plaintiffs would figure out how to divvy up the pie equitably. Sure.

The Ninth Circuit ruling is an anomaly that would vastly expand antitrust liability, giving plaintiff attorneys more bites at the Apple. Online marketplaces of all sorts including e-Bay, Amazon Marketplace, and Etsy that charge sellers fees or commissions could be affected. Ditto sharing-economy services such as Airbnb and TaskRabbit.

Thirty-one states have joined a brief asking the Court to overturn Illinois Brick, which they say limits their ability to protect consumers. The Clayton Act allows state AGs to bring antitrust actions on behalf of their citizens, so reversing Illinois Brick would empower them to tap another honey pot by suing tech companies.

One irony is that state AGs persuaded the Court last term to reverse its Quill precedent and allow states to collect sales tax from remote retailers. As a result, more mom-and-pop retailers are likely to off-load their responsibility to collect sales tax to platforms in return for a commission. Yet under the Ninth Circuit’s antitrust expansion, consumers could sue platforms for doing so.

The Supreme Court in Illinois Brick invited Congress to amend the Clayton Act if Members disagreed with its decision. Congress has since modified the law several times and considered reversing Illinois Brick but failed to do so. Expanding antitrust law by judicial decree would usurp Congress’s authority to regulate commerce and disrupt innovation that has benefited millions of consumers.


Blue State Taxes?

Like it or not, this may be one of the best results of the tax re-write… for everyone!
WSJ 1/2/2018

The great American migration out of high-tax states like New York and Illinois may be about to accelerate. The tax reform enacted last month caps the deduction for state and local taxes, known as SALT, at $10,000. This means millions of people will finally feel the full tax burden imposed by state and local politicians. When the SALT shield shrinks, so may people’s willingness to put up with these high taxes.

Such states already are losing population, and new Census Bureau data—released the same day tax reform passed the House and Senate—shows the continued migration. Of the seven states that grew the fastest between July 1, 2016, and July 1, 2017, four (Nevada, Washington, Florida and Texas) have no income tax, and the other three (Idaho, Utah and Arizona) have low taxes.

On the flip side, high-tax states like New York, New Jersey, Connecticut, Illinois and Rhode Island either lost residents or stagnated. Pennsylvania quietly became the fifthmost- populous state in the nation, displacing Illinois.

When people move, they take their money with them. The five high-tax states listed above have lost more than $200 billion of combined adjusted gross income since 1992, according to the website, which aggregates IRS data. In contrast, Nevada, Washington, Florida and Texas gained roughly the same amount.

If politicians in high-tax states want to prevent this migration from becoming a stampede, they will have to deliver fiscal discipline. At least a few seem to realize this. New Jersey’s Gov.-elect Phil Murphy campaigned on a promise to impose a “millionaires’ tax.” But the Democratic president of the state Senate, Steve Sweeney, said in November that New Jersey needs to “hit the pause button” because “we can’t afford to lose thousands of people.” His next words could have come from a Republican: “You know, 1% of the people in the state of New Jersey pay about 42% of its tax base. And you know, they can leave.”

New York City Mayor Bill de Blasio may need to rethink his proposed millionaires’ tax. George Sweeting, deputy director of the city’s Independent Budget Office, told Politico in November that eliminating the SALT deduction would “make it a tougher challenge if the city or the state wanted to raise their taxes.” New York state Comptroller Thomas DiNapoli added: “If you lose that deductibility, I worry about more middle-class families leaving.”

In October, 36 California Democrats in Congress wrote to GOP leaders: “The elimination of SALT would pressure state and local governments to make cuts and take in less revenue.” But this fiscal day of reckoning will be a good thing for the beleaguered residents of high-tax states and cities.

If tax reform was Congress’s Christmas present to the American people, the limit on the SALT deduction is a gift that will keep on giving. In the years to come it will spur additional tax cuts and forestall tax increases at the state and local level.

Democrats want to use the SALT limitation as a wedge to pick up House seats in 2018. They should be more concerned about losing control of state capitals and city councils once voters at last feel the full effects of their tax-and-spend agendas. Some residents will vote with their feet, but the rest will just vote.

Mr. Ortiz is president and CEO of the Job Creators Network.


Tax Actions before 2018 – WSJ

Just FYI.
WSJ 12/20/2017
For millions of Americans, the most important tax-planning tip between now and the end of the year is to check your charitable contributions.

They are on Schedule A, Line 19 of your tax return. Do these donations, plus your mortgage interest, allowable medical expenses, and $10,000 of state and local taxes, normally add up to more than $12,000 if you are single and $24,000 if you are married filing jointly?

Unless the total tops these amounts—or you have other uncommon deductions—the tax overhaul is likely to wipe out your donation write-offs next year and beyond.

Here’s why:

The tax overhaul nearly doubles the “standard” deduction, which is the amount filers get if they don’t itemize write-offs separately on Schedule A. Starting next year, the standard deduction will be $12,000 for single filers and $24,000 for married couples filing jointly.

Currently about 30% of filers, or 45 million, itemize their deductions. The pending change will cause perhaps 20 million or more of them to switch to the standard deduction. Many will be married couples, as the new $10,000 cap on state and local tax deductions is per return, not per person.

The bottom line is that affected taxpayers will no longer get value from deducting charitable donations.

There are ways around the coming limit. One is to accelerate donations that won’t make sense next year. Another is to “bunch” future donations so that every few years, it is possible to surmount the higher threshold and use a deduction.

Affected givers should also consider so-called donor- advised funds. These popular accounts enable donors to bunch smaller gifts into one large amount and take a deduction. The donor can then designate charitable recipients later, and meanwhile the assets can be invested and grow tax-free.

All year-end donors should think twice before writing a check to a charity or donor-advised fund, especially after the markets’ surge this year. A better move is often to contribute appreciated investments such as shares of stock. This allows the donor to take an immediate deduction for the full market value up to certain limits, while not having to pay capital-gains tax on the appreciation. This tax break isn’t being affected by the overhaul.

Donors who have IRAs and are 70½ or older have another good giving option. They can contribute up to $100,000 of IRA assets directly to one or more charities and have it count toward their annual required distributions from the IRA.

Here are other year-end tax moves to consider, based on the overhaul.

Accelerate state tax payments.

The new tax overhaul caps deductions of state and local income or sales and property taxes (SALT) at $10,000 per return.

The bill bars deductions for payments earmarked for 2018 state income taxes, but this leaves room for making other state tax payments before year-end.

David Lifson, a certified public accountant with Crowe Horwath, said it is permissible to make “generous estimates” of your 2017 state income-tax liability.

Tax specialists are also urging many clients to pay the balance due of 2017 state income taxes before Jan. 1 and to consider paying 2018 property taxes that will exceed next year’s limit.

Beware: Taxpayers who owe alternative minimum tax for 2017 will lose some or all of the value of SALT deductions. For them, accelerating payments could either provide no benefit or else reduce the benefit they have. Because the AMT is complex, it is difficult to know the best moves without using a computer program.

Also check whether your state will accept payments of 2018 property taxes this year. In general, says Mr. Lifson, taxpayers can only pay 2018 taxes already billed.

Pay employee business expenses. Under current law, unreimbursed business expenses can only be deducted if they exceed 2% of a worker’s income. This writeoff is being eliminated, so employees who take it should pay the expenses before year-end.

Harvest losses. An annual ritual for many investors with taxable accounts is meeting with brokers to “harvest” capital losses from losing positions. These losses can then offset taxable gains from winners.

A provision in the Senate bill would have ended investors’ ability to choose specific shares when selling part of a position, making loss harvesting far more difficult. This change didn’t make it into the final bill, to the relief of many.


The GOP Entitlement Caucus

My respect for the Freedom Caucus has slipped in a major way. It will take a long time for Republicans to recover from the damage they have done.
WSJ 3/28/2017

The full dimensions of the GOP’s self-defeat on health care will emerge over time, but one immediate consequence is giving up block grants for Medicaid. This transformation would have put the program on a budget for the first time since it was created in 1965, and the bill’s opponents ought to be held accountable for the rising spending that they could have prevented. The members of the House Freedom Caucus who killed Obama-Care’s repeal and replacement claim to be fiscal hawks. Most of them support a balanced budget amendment. Yet they gave zero credit to a reform that would have restored Medicaid—a safety net originally intended for poor women, children and the disabled—to its original, more limited purposes. Over the years liberal and some otherwise conservative states opened Medicaid benefits to new populations. And in 2010 ObamaCare added working-age, able-bodied adults above the poverty level. The result is that Medicaid now insures more than 72 million people, or one of every five Americans. In six states it’s one of every four or higher. Medicaid is now the third-largest program in the federal budget and the fastest growing. Federal outlays are nearly three times higher today than in 2000, as the nearby chart shows.

Republicans had a rare opening to change the projected trajectory, by limiting the federal government’s open-ended commitment. The federal government “matches” between 50% and 74% of costs for the pre-ObamaCare population, while new Medicaid earns 90%-95%. This formula rewards states that spend more and means they are less accountable for controlling spending or allocating resources toward high-quality care for the most vulnerable.

These disincentives, combined with price controls and low provider reimbursement rates, produce the worst health outcomes of any insurance in the U.S. A pioneering New England Journal of Medicine study in 2013 found that Medicaid “generated no significant improvement” across measures like mortality, high blood pressure or diabetes compared to the uninsured.

The House bill would have transitioned to a per-capita block grant that would grow with an index of medical inflation. The change would have broken the direct link between state spending and federal subsidies and started to make more of a defined contribution. In exchange, Governors would have gained reform flexibility. Federal Medicaid rules strictly limit state freedom to try new ideas, and the poor would be better off if decisions about their welfare are made locally instead of in Washington. States would have been better off as Medicaid crowds out other state priorities like education and public safety.

The bill wasn’t perfect. Per capita block grants that rise with medical inflation is insufficient fiscal discipline, and the bill would have added to the political pressure to join new Medicaid in the 19 states that haven’t. Block grants also would have been delayed until 2020, and the danger of waiting is that they get overturned by a future Congress or become a new version of the old “sustainable growth rate” recipe in Medicare—an orphan that Congress defers year after year.

But the Freedom Caucus decided to wait not until 2020 but forever. A fragile compromise that could attract majority support was rejected in favor of sustaining Medicaid’s march into insolvency. Republicans may not get a better chance for decades to modernize Medicaid in a way that helps the poor and taxpayers, and voters would be right to doubt the Freedom Caucus’s evanescent fiscal bona fides.