Good morning.
The tax plan unveiled by House Republicans last week prompted a weekend’s worth of partisan brawling, generating more heat than light. But if you are looking for the rare piece of smart and balanced analysis, I’d suggest this piece by Adam Looney of the Brookings Institution. Looney is an economist and was a top tax analyst in the Obama Treasury, so he knows his topic well. Here’s his rundown of the bill’s pluses and minuses.
First, the big plus:
“This plan addresses most major problems in our international corporate tax system with thoughtful and well-designed changes. It offers investment incentives and substantial simplification for small businesses. It picks up revenue to finance lower rates by eliminating ineffective deductions and credits, and through a host of other changes that chip away—modestly—at a variety of preferences for insurers, homebuyers, and other narrow interests that simply don’t make sense…That is how tax reform is supposed to work.”
On the downside, Looney sees three problems:
- A surprising lack of incentives to encourage or reward work. Why no increase in the earned income tax credit, for instance?
- A misguided plan to provide a tax break based on number of children, without regard for income—cutting taxes in “upper income taxpayers without encouraging either work or saving.”
- A gaping $1.5 trillion price tag over ten years, to be paid by the next generation of American taxpayers, who already face the prospect of paying the exploding costs of baby boomer retirement benefits.
Business groups, known to worry about deficits in the past, have reconciled themselves to point #3 by assuming the plan will boost economic growth enough to cover costs. That’s a heroic assumption. The plan will encourage investment in the U.S., but it requires some serious torturing of any economic model to get a $1.5 trillion payoff.
Looney offers some helpful suggestions to defray the cost—a top corporate rate of 25%, rather than 20%, for instance; or eliminating the exclusion of capital gains taxes at death. But the real danger is that special interest lobbying will push the price tag up, not down, as Republicans, unable to count on any Democratic votes, scramble to “buy” the support they need for passage.
Several tax-literate CEO Daily readers have also offered their thoughts on the bill.
P.M., a life-long tax ninja, praises the bill’s limits on the deductibility of executive compensation, and its 1.5% excise tax on elite college endowment earnings. “Gotta love the anti-elitist stuff!”
And N.P., also a tax connoisseur, explains why the NFIB is opposing the plan. He notes that “most small businesses are service businesses,” will get no benefit from the pass-through provision, will lose state and local tax and other deductions, and may see their personal rate rise from 25%, 28%, or 33% to 35%.
More news below.
Alan Murray @alansmurray alan.murray@fortune.com
Top News
•Broadcom Confirms $103 Billion Offer for Qualcomm
Communications chip maker Broadcom confirmed a widely-trailed offer for smartphone chip maker Qualcomm, for $70 per share or $103 billion in cash and stock. It will be the biggest technology acquisition ever. A tie-up would combine two of the largest makers of wireless communications chips for mobile phones and raise the stakes for Intel, which has been diversifying into smartphone technology from its stronghold in computers. Broadcom's offer is at a premium of 27.6% to Qualcomm's closing price of $54.84 on Thursday, a day before details of the offer began to leak. Reuters
• Game of Desert Thrones
Crown Prince Mohammed bin Salman of Saudi Arabia had dozens of royal family members and senior officials arrested, in a move passed off as an anti-corruption sweep. Those arrested include the ‘Saudi Warren Buffett’, Prince Al-Waleed bin Talal, investor in Apple, Citigroup, News Corp, Lyft, and much else besides. The detention of the modernizing and (by Saudi standards) liberal Al-Waleed suggests that the move is less about the direction Saudi Arabia is taking, than about who gets to lead it on its journey. Crude oil prices surged to a two-year high on concerns about political risk: the weekend started with the resignation of Lebanon’s Prime Minister after what appeared to be another ‘MbS’ power play. Fortune
•Trouble in Paradise for Ross
Commerce Secretary Wilbur Ross figured prominently in the latest hack of internal documents from the world of offshore tax havens. The documents show that Ross’s company has kept an investment in Navigator—a shipping company that lists Russian gas and petrochemical company Sibur among its largest clients—since Ross accepted his position in government. The problem: Sibur’s shareholders include Gennady Timchenko and Vladimir Putin’s son-in-law Kirill Shamallov, both sanctioned by the U.S. and EU. Fortune
•Bezos Sells As Everyone Else Buys
The Wall Street Journal highlighted a new wave of discounts on third-party sellers’ goods on Amazon’s marketplace. The move is ostensibly a seasonal initiative but illustrates increasing margin pressure on the company’s core business as the competition (notably Walmart) gets its e-commerce act together. Separately, Jeff Bezos cashed in another $1.1 billion of Amazon stock. He probably didn’t mean as a comment on last week’s 10% earnings-related pop, but he can’t help it looking like that. Fortune
Around the Water Cooler
•Masayoshi Son’s Plan B for Sprint
Sprint’s heartbreak at being jilted by T-Mobile didn’t last long. It agreed a strategic distribution deal with Altice USA at the weekend under which Altice will use Sprint’s network to offer U.S. voice and data services, while Sprint will use Altice’s cable infrastructure to expands its data network and bolster its efforts to develop 5G services. The deal raises questions as to how T-Mobile will respond. Fortune
•News About Fakes
Buried in Facebook’s quarterly earnings last week, and somewhat overshadowed by the Congressional hearings, is another uncomfortable fact for the social media giant: up to 10% of its accounts are duplicates, and another 2%-3% are “inauthentic” and used “for spam and other policy violating reasons.” That’s 60 million accounts that could be entirely fake, and up to 200 million whose primary use is for puffing up the numbers in pitches to advertisers. Fortune
•Thor Hammers the Box Office
Thor Ragnarok opened the holiday box office season with a bang, pulling in an estimated $121 million across North America over the weekend, to add to $306 million taken in the first week of a staggered global release. The news should lighten the mood at Disney after a summer overshadowed by the woes of ESPN and, to a lesser extent, ABC. Fortune
Summaries by Geoffrey Smith; geoffrey.smith@fortune.com
