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CEO Daily: Monday, 3rd April

Good morning.

For those of you who still think a major tax reform is possible this year, I call your attention to a piece published this weekend by my former co-conspirator Jeffrey Birnbaum, with whom I covered the 1986 tax reform bill and then wrote Showdown at Gucci Gulch (still in print, still worth reading, and available here.)

Birnbaum makes a number of good points, but the key one is this: tax reform is about economic interests, not ideology or political affiliation. The big fights are over things like imposing a new border tax on imports, eliminating deductions for interest payments, eliminating state and local tax deductions, changing capital gains rules – and those are not fights that break along party lines.

To succeed, therefore, the tax reform effort has to do two things. First, it must establish broad and bipartisan public support for the overarching goal of the reform. And then it must create bipartisan coalitions of interests to support the details. Note the use of the word “bipartisan” in both previous sentences. The lesson of 1986 is that you cannot hope to achieve tax reform on a partisan basis. Competition between the parties can help drive the tax reform dynamic, as it did in 1986; but without some ability to work across the aisle, you can’t assemble a majority for reform.

In today’s increasingly hyper-partisan atmosphere, can an effort so dependent on bipartisan coalitions and cooperation have any hope? Well, I would never say never. But if tax reform was improbable in 1986, then it is approaching the inconceivable in 2017.

Nevertheless, the administration is plunging head first into the effort, according to the latest reports.

And as I’ve said here before, even if a sweeping tax reform bill is all-but-impossible, more modest tax changes are within reach. A repatriation deal – cutting the tax rate on corporate earnings locked overseas, even if temporarily, in return for new investment in U.S. jobs and infrastructure – is waiting to be done, and could be a small stepping stone toward restoring some confidence in Washington’s ability to govern.

But as for the big deal – it’s hard to fix our broken tax policy until you first fix our broken politics.

Alan Murray

Top News

Markets Start Quarter in Upbeat Mood

World stocks have started the second quarter positively, after a hesitant end to March amid fears for President Donald Trump’s ability to push through his promised tax reform. The Nikkei and Euro Stoxx 50 are both higher, the latter helped by strong business confidence surveys in Germany, France and Italy. Crude oil futures are holding above $50 on growing expectation that OPEC will extend its current output restraint deal beyond its scheduled end in June. However, markets are expected to stay cautious ahead of Trump’s meeting with Xi Jinping on Thursday and Friday – and the monthly U.S. jobs report on Friday.  Reuters

Imagine There’s No Apple…and No Investors Too

Shares in U.K.-based Imagination Technologies, which designs graphics chips, fell over 60% Monday in London after it said Apple (which accounts for over half of its sales) would stop using its products over the next two years. Apple had looked at buying Imagination last year, but has now chosen to work on a “separate, independent graphics design in order to control its products,” Imagination said in a stock exchange filing. In a show of defiance, the U.K. company said it doubted Apple’s ability to develop its own chip designs without violating Imagination’s own intellectual property rights. Reuters

H-1B Applications Open, With Reform Bill in Limbo

Applications for this year’s batch of visas open today, with quotas and allocations for the controversial program essentially unchanged. 85,000 visas will be awarded from an applicant pool that could exceed last year’s 230,000. With the H-1B reform bill sitting untouched in the House Judiciary Committee for the last two months, it looks like the administration has quietly sidelined, at least for this year, an issue that has provoked strong opposition from the tech sector in particular. Tech companies are not only eager to attract the world’s best talent. They’re eager to get it 25% cheaper than the best on offer within the U.S., according to one Bloomberg survey. Fortune

Johnson Looks to Grow Starbucks in Suburbia, Midwest

Kevin Johnson officially takes over from Howard Schultz as CEO of Starbucks today, at a time when the company (like the restaurant sector in general) faces something of a slowdown. Starbucks’ problems are made worse by teething problems with new processes for handling online orders and by a backlash against it from conservative customers, who are angry at Schultz’s public rebuke to President Trump’s travel ban. In an interview with The Wall Street Journal, Johnson played up the potential for more fresh food offerings in the company’s stores, as well as growth opportunities in the Midwest and suburbia nationwide. Fortune

Around the Water Cooler

Tesla On Track

Tesla said it delivered 24,900 vehicles to customers in the first quarter, in line with a target of 50,000 for the first half of 2017. It also had another 4,650 in transit to customers that will be counted in the 2Q numbers. There was little upside in the news for the company, but every target met helps to allay doubts about its ability to carry out the transformational ramp-up of production volumes with the Model 3. Deliveries had dipped 9.4% in the previous quarter due to issues with the company’s new assisted driving feature, which it persists in calling Autopilot, in a characteristic monodigital salute to Fate. Fortune

Daimler Retreats From Fuel Cells

Daimler, the owner of Mercedes-Benz and Smart, has largely ditched its plans to develop hydrogen fuel cells. Instead, it will bet more heavily on batteries, which have gained a seemingly invincible lead in the race to find an alternative fuel to gasoline. Daimler had agreed in 2013 to develop fuel cells jointly with Ford and Renault-Nissan, but with lithum-ion batteries boasting faster improvements in performance and sharper falls in price, fuel cells are in danger of becoming an expensive and misguided bet – unless Toyota, which champions the technology, can still pull a rabbit out of its hat. Fortune

Tourism Sector Sweats on Dollar, Trump Initiatives

Expedia CEO Dara Khosrowshahi warned the U.S. tourism industry is facing a bad year as the strong dollar and travel restriction initiatives by the new administration make the U.S. a more expensive and less welcoming place for foreign visitors. That’s a worry because the tourism industry accounted for over 8% of GDP last year. Khosrowshahi told the Financial Times the evidence from traffic on Expedia’s site suggests airlines and hotels are already cutting prices to sustain volumes. Airlines are also cutting capacity on some routes. Expedia recently appointed Chelsea Clinton to its board, but Khosrowshahi argued the move had no political significance. FT, metered access

Rock in a Hard Place

It’s essentially hot air, but it’s a fine illustration of the pitfalls that the U.K. and EU face over the next couple of years. A seemingly innocuous clause in the EU’s negotiation guidelines about Spain needing to approve how any future EU-U.K. trade deal affects its border with Gibraltar blew up at the weekend into a major diplomatic row. One former Conservative Party leader drew (as the diplomats say) ‘unhelpful’ parallels with the 1982 Falklands War. No-one appears to have told him what has happened to the U.K.’s military capability since then. Optimists would argue that flushing out and exposing the poisonous contribution of imperial nostalgia in the Brexit debate at an early stage could have some merit. It would be a heroic assumption. Telegraph

Summaries by Geoffrey Smith;