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CEO Daily: Monday, 24th April

Good morning.

President Trump continues to tease that a big announcement on tax reform is imminent. “Big TAX REFORM AND TAX REDUCTION will be announced this week” he tweeted Saturday morning. Separate reports indicate the Treasury Department is still far from a detailed plan, but an announcement this week could provide a general outline.

Tax reform, of course, is one of the two big drivers of business optimism sparked by Trump’s election—the other being deregulation. The election of Republican majorities in both the House and Senate meant Trump came into office with the best opportunity to pass pro-business tax legislation in more than a decade.

But as the year drags on, the prospects are dwindling. The first problem is Trump has shown no ability to win Democratic votes in Congress—and his continued refusal to release his tax return has exacerbated partisan opposition. That means a tax bill likely has to pass on a party-line vote, making it increasingly complicated.

Below are the three basic scenarios for tax reform:

1) A 1986 Reagan-style tax reform. The problem with this option is that in addition to cutting tax rates, you have to offset the revenue loss. And getting solid Republican support for any of the big “offset” proposals—creating a new border adjustment tax; eliminating deductions for business interest, state and local taxes, or charitable deductions; or taking a flyer on a carbon tax or value-added tax—seems highly unlikely.

2) A 1981 Reagan-style tax cut. Note the words “tax reduction” in Trump’s tweet. Treasury Secretary Mnuchin said in an interview Saturday that his department is now looking for reforms “that will pay for themselves with growth”—a clear sign that it is losing the battle to find offsets. Tax cuts certainly can increase growth, but only in limited cases will they do so enough to pay for themselves. Whether the administration can get the congressional Joint Committee on Taxation to agree to such a plan, or avoid making its tax cut temporary to meet the requirements of the budget act, is far from clear.

3) A modest repatriation/infrastructure tax plan. A temporary tax cut on repatriated earnings may be the one tax cut that would actually pay for itself—since right now companies have some $2 trillion squirreled away overseas that they aren’t paying any U.S. taxes on. If tied to infrastructure spending, it could even win some Democratic support.

I continue to bet option 3 is the most likely to emerge from this process, although I suspect any announcement this week will sound more like option 2 . Option 1 is probably off the table, unless the President is willing to take a bold new tack to change the political dynamic—perhaps by releasing his tax return, or by accepting a limit on interest tax reductions that would hurt his real estate business.

More news below, including Emmanuel Macron and Marine Le Pen’s victory in the first round of French elections. Missing in much of the coverage of Macron is his strong support for the technology and innovation. I interviewed him on the topic at CES 2016; you can watch that interview here. I recall thinking at the time that I wished the U.S. candidates were as thoughtful on the subject as he was.

Alan Murray

Top News


Markets Surge on French Poll Result Elections

Global stock markets leapt for joy at the prospect of victory in France’s presidential elections for Emmanuel Macron, who has pledged to keep the EU intact and drag France into the modern age. The CAC-40 was up over 4% in Paris, led by the banks who had most to lose from threats by the populist candidates to pull France out of the Eurozone. The euro itself hit a five-month high against the dollar and is 1.3% up on its Friday close this morning. With Eurozone business confidence at a 10-year high, and with political risk in Europe now fast receding, the European Central Bank may now be able to exit its ultra-loose monetary policy earlier than it had dared to hope for. Fortune

Becton, Dickinson Buys Bard for $24 Billion

Medical equipment supplier Becton, Dickinson and Co is buying C.R. Bardin a $24 billion cash-and-stock deal, adding Bard’s devices to its portfolio in the high-growth sectors of oncology and surgery. The deal comes two years after Becton Dickinson bought CareFusion for $12 billion and is the latest in a string of deals in the medical technology sector, as manufacturers turn to acquisitions to boost profit margins. The deal values Bard at $317 per share, a 25% premium over Friday’s close of trading, and will give Bard shareholders around 15% of the combined company. Fortune

China Responds to Steel Probe

Twenty-nine Chinese steel firms have had their licenses revoked as Beijing revived its campaign to tackle overcapacity in the sector only days after President Donald Trump opened a probe into cheap steel imports. China has an ongoing reform plan aimed at cutting surplus steel capacity that many estimate at around 300 million tons, about three times Japan’s annual output. While the closures may not be directly related to Trump’s move, it does appear timed to send a conciliatory message to Washington (and to Europe, which is also bitterly complaining about the glut of Chinese steel). Reuters

JAB Slips Off Its Shoes

Jimmy Choo, shoemaker to the rich and famous and their aspiring imitators, has put itself up for sale only a couple of years after listing. The shares had only recently returned to near their IPO price after a rocky start. Majority owner JAB Luxury, an affiliate of the German private equity group that was last seen buying bakery chain Panera, is supporting the move and has also put another shoemaker, Bally, up for sale. That will allow JAB to focus more on food and drink. Strong earnings from the likes of LVMH and Hermes in the last couple of weeks suggest that the luxury sector’s traditional giants will not lack appetite for what could be an attractive addition to their brand collections. Fortune

Around the Water Cooler

Hulu’s Big Catch-Up Gamble

Today, Fortune is publishing Michal Lev-Ram’s feature on streaming service Hulu, which you will also find in our print edition for May. Long overshadowed by Netflix and Amazon Prime, the company is about to overhaul its service with a new package of live-TV programming to add to the catalogue of content from established channels that has been its main fare to date. It will cost just under $40 a month, significantly less than most viewers’ cable packages. It’s a delicate balancing act, one that risks undermining its ties with the channels that provide most of its content. Fortune

Brexit Bursts the London Bubble

Has Brexit done what the U.K.’s worst three recessions in recent history failed to do? London’s house prices, fell by 2% in April, the biggest drop in eight years, according to a closely-watched realtor’s survey. The threat of thousands of highly-paid bankers moving to other financial centers on the Continent as the City of London loses full access to its biggest market has put a chill on an asset class that has ignored traditional affordability metrics for 30 years. Higher taxes on top-end properties have hit that segment hardest of all, a development which will cause nothing but glee outside the capital, but which will convince many inside the bubble that the Brexit Apocalypse has finally begun in earnest.  Bloomberg

LafargeHolcim CEO Out After Syria Probe

LafargeHolcim, the world’s biggest cement group, said CEO Eric Olsen will leave the company in July, in the wake of an investigation into allegations the company paid armed groups in Syria to keep a plant operating. The company admitted in March that its plant in Jallabiya probably paid protection money to keep running in the war-torn country. Olsen was cleared of wrongdoing by an internal investigation, but French prosecutors are still investigating the company. The French and Swiss companies had fought long and hard over who would run the combined company after their merger, and Olsen’s departure may reopen wounds that were still healing. Reuters

Munoz Forfeits United Chair

United Continental Airlines said Friday that its CEO Oscar Munoz would no longer take over the chairmanship of the country, as originally planned. It’s the first clear consequences in United’s top management from the viral mishandling of an overbooking situation on one of its flights two weeks ago. United also said it would revamp its executive compensation scheme to link it more closely to customer satisfaction targets. Fortune

Summaries by Geoffrey Smith; @geoffreytsmith