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CEO Daily: Thursday, 27th April

Good morning.

Do tax cuts pay for themselves?

I’ve spent countless hours of a long career reporting on that question—tracking the story back to its origins on Arthur Laffer’s napkin in a Washington hotel in 1974; spending hours interviewing the colorful collection of characters who first peddled the idea, including the late Jude Wanniski, the late Robert Bartley, and the indefatigable Jack Kemp; following the conversion of Alan Greenspan, the apostasy of David Stockman, and the embrace by George W. Bush in rebellion against his father. I have read countless papers on both sides of the issue, and seen economic statistics tortured near death in defense of one side or the other.

So it is with some experience and a little weariness that I answer: it depends. Back in 1963 when the top personal tax rate was 91%, it is very likely the Laffer Curve held, and cutting exorbitantly high rates led to more revenue, not less, by increasing incentives to work and invest. It’s also true that for certain taxes that easily can be avoided—like the tax on capital gains (you don’t have to pay if you don’t sell the asset) or the tax on overseas earnings (you don’t have to pay if you don’t bring the money home)—a targeted tax cut can coax out more revenue.

But will Donald Trump’s exceedingly generous tax cut plan, unveiled in outline form yesterday, stimulate the economy enough to offset the trillions of dollars it would lose in a static revenue analysis? Economics is a notoriously imprecise science, because it relies on human behavior; but all the economic evidence I’ve seen suggests that is extremely unlikely. And by “extremely unlikely,” I mean: it’s not going to happen.

Stephen Moore, who has long plowed these fields and is an on-again-off-again adviser to Trump, makes the best possible case for the argument in a piece yesterday on The Wall Street Journal‘s editorial page. He points out that the Congressional Budget Office is currently forecasting a grim average growth rate of 1.9% over the next 30 years. If a tax cut can boost that to 3%—still below the average growth rate between 1974 and 2001 of 3.3%—additional growth would eventually spin off an extra $2.5 trillion in revenue each year. Voila! Tax cuts paid for.

Problem is, that kind of growth requires not only a significant increase in productivity, but also a surge in new workers—a huge demographic challenge given the retirement of the baby boomers. Moore says the problem could be solved with an increase in immigration. But needless to say, he hasn’t sold Trump on that idea.

In any event, the real challenge President Trump now faces is convincing Congress that his math works. He would need sixty votes in the Senate to make the tax cut permanent—an impossibility given today’s partisan environment. He can do a temporary tax cut with Republican votes alone, but even getting them to agree will be a challenge. And a temporary tax cut, which gives companies little incentive to make long-term investments, is even less likely to have the kind of growth effect that Moore projects.

So don’t count your tax savings yet.

News below.

Alan Murray

Top News

Trump Backs Down on NAFTA Withdrawal

The White House rowed back from leaks suggesting President Trump was preparing an executive order pulling the U.S. out of the North American Free Trade Agreement. A statement said he would instead seek “to bring NAFTA up to date through renegotiation.” The news reversed the sharp drops in the Canadian dollar and Mexican peso, caused by the leaks. Some speculated that the incident was largely intended to pressure Congress to speed up the confirmation of Robert Lighthizer as U.S. Trade Representative. Elsewhere, Trump also ordered a review of aluminum imports on national security grounds, mirroring the action he ordered on steel imports last week. Fortune

Pai Charts New Course on Net Neutrality

Federal Communications Commission Ajit Pai confirmed he plans to roll back some of the rules laid down in 2015 that were intended to guarantee Net Neutrality. Those rules were designed to stop internet service providers from prioritizing certain traffic and relegating other traffic to de facto ‘slow lanes.’ Pai agreed with the ISP and cable industry that the rules had created an unnecessary regulatory burden, at a time when network providers are facing a massive increase in demand for capacity as virtually every area of life goes digital. Supporters of Net Neutrality continue to fret that abolishing it would concentrate too much power in the hands of network providers and of those who have the most clout with them, such as Facebook, Netflix, and Amazon. Fortune

Didi’s Valuation Hits $50 Billion in New $6 Billion Funding Round

Chinese ride-hailing company Didi Chuxing raised $6 billion in a fresh funding round that valued it at over $50 billion, according to Reuters sources. That makes it China’s most valuable startup. Investors included Softbank, Silver Lake Partners, China Merchants Bank, and Bank of Communications. The money will be used to fund Didi’s international expansion, which promises to extend far and wide the practice of offering transport at below-cost prices in a bitter struggle for market share with Uber and existing taxi and public transport networks. The practice has now been restricted in Didi’s home market in China. Fortune

Digital Ad Duopoly Tightens

The digital ad market in the U.S. grew 20% last year to $72.5 billion, and almost 90% of that growth was accounted for by two firms—Google and Facebook. The Interactive Advertising Bureau argued that its figures were misrepresented by rivals. However, Pivotal Research said that, if anything, they understate the actual dominance of the duopoly. Analyst Brian Wieser argued that they accounted for 99% of all of last year’s growth. Fortune


Around the Water Cooler

More Users, Less Revenue at Twitter

Shares in Twitter rose over 8% to a two-month high, after the micro-blogging site reported its largest rise in monthly average users since 2015. It now has 328 million MAUs, a little less than half of Instagram’s. The 14% increase was the fourth straight quarterly rise, but couldn’t stop revenue falling 8% on the year. The company also warned that revenue would stay under pressure for the rest of the year due to the winding down of some unsuccessful ad products. Fortune

Soon You’ll Be Begging United to Bump You

United Continental announced a 10-point plan to improve customer relations after the recent fiasco with the forcible removal of a passenger from an overbooked flight. The one that grabbed most attention was an increase in maximum compensation for voluntary denied boarding to $10,000. It also pledged only to call on law enforcement for safety and security issues. Disappointingly for some, there was nothing about improving the conditions and rights of giant bunnies. Fortune

Fiat Chrysler Bucks the Auto Blues

Fiat Chrysler shares rose over 10.5%, their biggest one-day gain in two and a half years, after the company reported an 11% rise in first-quarter operating profit. That bucked the recent trend of gloomy news out of the auto sector and reflected growing success in shifting to a product mix with more high-margin SUVs. FCA has been phasing out cars like the Dodge Dart and Chrysler 200 in favor of models such as the Jeep Compass. Elsewhere, VW wormed its way further into the ride-hailing business as its Europe-based partner Gett bought U.S. operator Juno for $250 million. Fortune

Airbus Struggles to Keep Up

Airbus said underlying earnings fell 52% in the first quarter due to delivery problems with key products: the short-haul A320 neo continues to be dogged by problems with its Pratt & Whitney engines, and the supply chain for the twin-aisle A350 is still blocked (although it said the problem was easing). Almost inevitably, the company also said talks with European governments over cost overruns with the A400M military transport plane will stretch into 2018. None of those problems appears to be holding back its share price, however. It’s up 36% in the last six months. Bloomberg

Summaries by Geoffrey Smith; @geoffreytsmith