Good morning.
The Dow stands on the brink of 20,000, driven in part by optimism of a major tax reform bill getting through Congress next year. While the odds of that are the best they’ve been in many years, it’s still far from a sure thing.
I cut my teeth as a Washington reporter covering the Tax Reform Act of 1986, which is now being held up as the model for the GOP tax bill of 2017. It was guided from the beginning by two fundamental principles – it was to be revenue neutral, meaning it would raise as much revenue as the existing tax system; and it was to be distributionally neutral, meaning it would not shift the burden of taxation among income groups.
Trump’s campaign plan meets neither of those goals – its tax cuts would increase the budget deficit and they would cut taxes more deeply for high-income Americans. But campaign plans are always more symbolism than reality. Given the nation’s growing federal debt burden (about to be exacerbated by rising interest rates) and the yawning class divide revealed by this year’s election, Republicans would be wise to adopt both of Ronald Reagan’s 1986 guidelines as starting points.
But that’s where the going gets tough. Cutting taxes is easy – politicians from both parties are happy to do it. Paying for tax cuts is hard. In a revenue neutral bill, there will both winners and losers. And it’s the nature of politics that losers make more noise than the winners. That’s already started, with retailers howling about a proposed border adjustment that penalizes imports, and realtors and bankers gearing up to fight any reductions in the mortgage interest deduction. It’s going to be a very good year for Washington lobbyists.
Jeff Birnbaum and I wrote the story of the 1986 bill in Showdown at Gucci Gulch; Lawmakers, Lobbyists and the Unlikely Triumph of Tax Reform. (Still in print, here.) The word “unlikely” was carefully chosen, for the reason mentioned above. Tax reform overcame the odds in 2016 in part because of an unusual set of personalities and circumstances, and in part because of a very dedicated group of largely non-partisan tax experts in government who trusted each other and were determined to do something in the public interest. Today, such non-partisan players are increasingly in short supply, and trust is hard to come by.
That’s not to say broad-based tax reform can’t happen in 2017. It’s just to say the odds are a still good bit longer than the market’s euphoria seems to suggest.
More news below.
| Alan Murray | |
| @alansmurray | |
| alan.murray@fortune.com |
Top News
• ISIS Claims Responsibility for Berlin Market Attack
A mouthpiece of Islamic State claimed its responsibility for the attack on a Christmas market in Berlin. How direct and firm the supposed chain of command was remains unknown, not least because the killer, who appears to have shot the Polish man whose truck he hijacked, remains at large. Berlin police (true to form, its critics would say) appear to have arrested the first dark-skinned man who couldn’t run away fast enough. They were forced to release him later due to lack of evidence. That gave Angela Merkel at least temporary respite from those who rushed to judgment in blaming her refugee policy for the attack. Elsewhere, larger numbers of people died in an explosion at a Mexican fireworks factory, and in trying to get drunk on bath lotion in Russia. Both illustrate very real and deep-seated issues in those countries, which will no doubt claim more victims in 2017, but neither has anything like the apocalyptic quality of the civilizational clash afflicting Europe right now. Time
• Obama’s Parting Shot on Arctic Drilling
The White House said Barack Obama will permanently ban offshore drilling in most of the U.S.-controlled Arctic as well as off much of the Atlantic Seaboard, using a little-known 1953 law that gives the President such authority. The move—billed as an effort to conserve important marine species and protect against oil spills—represents a last-ditch measure by Obama to strengthen his environmental legacy in advance of President-elect Donald Trump taking office in January. Trump has promised to boost the oil and gas industry by “scrapping” many Obama-era environmental regulations. The move, which raises obvious questions about the nature of sovereignty, will almost certainly be challenged in court. Time
• Facebook Faces EU Fine Tied to Whatsapp Merger
Facebook faces a hefty fine from the EU after antitrust regulators accused it of misleading them during its 2014 takeover of Whatsapp. The EU Commission had waved through the deal without conditions after Facebook had assured it that would be impossible to combine user information from the two social media services’ automatically. This summer, of course, it did just that, to a chorus of complaints from both users and competitors. The maximum fine is 1% of global revenue, so around $125 million, based on Facebook’s 2014 data. FT, metered access
• VW Settles Over Larger Models’ Emissions Violations
After a last-minute hiccup on Monday, Volkswagen agreed to a compensation plan for buyers of 83,000 vehicles with 3-liter engines that violated U.S. emissions standards. As previously indicated, the settlement will come to around $1 billion, including a contribution of $25o million towards environmental remediation measures at state and local level. Separately, The Wall Street Journal reported that component supplier Robert Bosch, which provided the ‘defeat devices’ that VW had used, agreed to pay around $300 million in respect of its role in the crisis. VW had also agreed Monday to a $1.56 billion settlement with Canadian authorities, which still needs the approval of courts in Ontario and Quebec. Back home, the company said it had received clearance from German regulators for a fix to all 9 million of the affected vehicles sold in the EU, where it is still successfully resisting efforts to extract financial penalties. Fortune
Around the Water Cooler
• Nike Gets Some Love From Wall Street
Shares in Nike rose over 4% in response to a stronger-than-expected quarter that showed it making big gains in higher-margin ‘direct-to-customer’ sales (the flip side of a trend that did for Sports Authority). However, Wall Street, which has distinctly fallen out of love with the sports gear maker this year, still found something to fret about, in that Nike’s ‘future orders’ rose only 2%, missing forecasts for a 5.2% rise. The company says analysts overplay the threat to it from Under Armour and Adidas, but both have done well this year at Nike’s expense, especially in basketball gear. Fortune
• Big Trouble at Big Food
General Mills’ turnaround is taking longer than it hoped. The maker of Cheerios and Yoplait posted a second straight quarter of falling sales, due mainly to problems in its yogurt ranges. CEO Jeff Harmening said he expected declines to slow in the second half of its fiscal year, but a turnaround in that timeframe was unrealistic. General Mills—which sells yogurts under the Yoplait, GoGurt, Annie’s and Liberté names—has underperformed the industry because it wasn’t quick to respond to a shift in consumer demand towards lighter and organic products. To make matters worse, its launch of new products in those areas has been badly implemented, its critics say. Fortune
• Google’s Attack of Common Sense
A week after saying it didn’t intend to change its search algorithm to combat fake news (notably articles written by Holocaust deniers), Google said it would do just that. “Judging which pages on the web best answer a query is a challenging problem and we don’t always get it right,” a spokesperson told Fortune. “We recently made improvements to our algorithm that will help surface more high quality, credible content on the web. We’ll continue to change our algorithms over time in order to tackle these challenges.” The company of course constantly refines its technology to ensure that it stays the most attractive analytical tool around for advertizers. That doesn’t stop this episode giving the impression of a company too in love with itself to acknowledge even glaringly obvious shortcomings. As with Facebook, that would matter much less if Google didn’t have such power in shaping people’s perception of the world around them. Fortune
• Russian Hackers Blamed for Online Ad Scam
Russian scammers have built the most lucrative ad fraud operation on record, according to security researchers at fraud-fighting firm White Ops. The cybercriminals developed an army of automated web browsers, dubbed “Methbot” by the researchers, which stole millions of dollars per day from the biggest advertisers on the web. The ring has been raking in $3 million to $5 million per day by White Ops’ estimates. “Methbot” is the most lucrative ad fraud operation on record. While advertisers thought they were advertising on real websites, they were in fact buying counterfeit ad inventory on facsimile sites visited by bots. The researchers report that the scam affected more than 6,000 top publishers’ websites, including the Huffington Post, The Economist, ESPN, Vogue, CBS Sports, Fox News and, sigh, even Fortune. Fortune
Summaries by Geoffrey Smith Geoffrey.smith@fortune.com;
@geoffreytsmith
