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CEO Daily: Monday, 15th May

Good morning.

I was in Washington Friday, where I was told in no uncertain terms that the Trump team is planning to push a 1986-style tax reform—closing loopholes as well as cutting rates—and not just a 1981-style tax cut—justified by boosting economic growth. (If you haven’t read the President’s comments about “pump-priming” in The Economist—at one point, he suggests he invented the term—you should do so here.)

In fact, the administration seems to be pursuing a hybrid—part tax reform, part tax cut. But let’s focus on reform for a moment. The thing about tax reform is that it creates losers as well as winners. And what makes it so difficult politically is that the losers have a tendency to make more noise than the winners.

On the individual side, the administration already has identified the big losers—people who live in high-tax states like New York and California, who would lose their state and local tax deduction. Those are mostly blue states, with Democratic Senators who won’t support the President’s plan anyway, so they can scream away.

But things get more interesting on the corporate side. If the plan cuts the corporate tax rate in half and pays for it by closing loopholes, a lot of companies that now pay effective tax rates below that may see their tax bills go up. We don’t have full details yet, but the losers probably will include energy companies, utilities and heavy industry, which use a variety of special tax breaks to lower their bills. (For a sense of potential losers, check out this report on 18 big companies that effectively pay no taxes.) Will those companies be willing to accept the hit, in the name of moving to a saner corporate tax system?

We will see. Already, the business community is fighting like pit bulls over the House-proposed Border Adjustment Tax, which is favored by manufacturers and opposed by retailers. My email box is filled with nasty missives from a retailer-backed group called “Americans for Affordable Products,” which among other things has attacked GE CEO Jeff Immelt for “hypocrisy” and “mostly false” comments about the BAT.

The BAT seems likely to die. But fights over oil and gas depletion allowances and various investment tax breaks will be no less intense. If the business community really wants corporate tax reform, it is going to have to figure out a way to put its collective interest ahead of parochial interests. No sign of that yet.

I talked Friday with Dow CEO Andrew Liveris, who has become one of the administration’s closest business allies (and who last week announced major new job-creating investments in the U.S.). Tax reform, along with deregulation, is the big payoff for business, he says: “It’s huge. This is like all our Christmases coming at once.” He recognizes the business community still has some work to do to corral its unruly troops, but he is optimistic they will do so. “I’m not starry-eyed,” he says, “but I’m optimistic.”

Immelt, speaking to my colleague Susie Gharib recently, sounded less so. “We’re not counting on it happening.”

News below.

Alan Murray

Top News

Ransomware. Everywhere.

The world remains on edge as a new working week threatens to trigger a fresh wave of chaos caused by the WannaCry malware virus. The virus wrought havoc in over 150 countries, notably in health care systems and at logistics firm Fedex. French carmaker Renault was also forced to shut down factories across Europe. Though researchers have found a “kill switch” that seems to have hampered the software’s spread, the attack is widely expected to continue in modified form. Fortune

Oil Prices Leap on Saudi-Russian Deal

Crude oil prices surged nearly 2.5% to their highest level in two weeks after the world’s two biggest producers agreed in principle to extend a deal on output restraint through March 2018. Saudi Arabia and Russia effectively admitted they can’t stop the rebound in U.S. shale output, at least not without wrecking their own economies. The Saudi-Russia declaration isn’t binding but means an extension of a deal that is holding back 1.8 million barrels a day in output is a near-certainty when OPEC ministers meet in Vienna in 10 days’ time. Fortune

Xi Steps up Trade Leadership Campaign

At a glitzy summit, China’s President Xi Jinping beat the drum for his “One Belt, One Road” initiative, which is essentially a strategy for assuming the leadership role in global trade. That’s a role that the U.S. has appeared intent on abdicating, with both candidates having demonized the Trans Pacific Partnership during last year’s election campaign. (A statement from  G7 finance ministers after their weekend meeting diluted the previous strong commitment to rejecting protectionism in all forms.) As at Davos earlier this year, Xi stressed the importance of rejecting protectionism and improving policy coordination. He again glossed over the importance to the modern economy of trade in ideas and technology, areas where China has routinely restricted access to its market and infringed property rights for decades. Fortune

The Inkaputtable Angela Merkel

Angela Merkel looks on track for a record-equalling fourth election victory in Germany in September. Her CDU party won elections to the state parliament of North Rhine-Westphalia, Germany’s most populous state, at the weekend by a surprisingly comfortable margin, only a week after doing the same in the smaller northern state of Schleswig-Holstein. Elections to the Bundestag are likely to confirm the ebb of populist sentiment across Europe, even though the right-wing AfD also performed better than expected, gaining 7.5% of the vote. It’s now represented in 12 of Germany’s 16 state legislatures. A fourth term for Merkel would make it harder for France’s Emmanuel Macron to wring concessions on Eurozone governance out of Germany, one of the key elements of his election manifesto. Germany’s DAX index opened at a new record high. Spiegel

Around the Water Cooler


Microsoft Hits Out at Government Stockpiling of Hacking Tools

Microsoft lashed out at the “stockpiling of vulnerabilities” by government agencies after the cyber-attack that had so brutally exposed weaknesses in older versions of its Windows software. “Repeatedly, exploits in the hands of governments have leaked into the public domain and caused widespread damage,” Microsoft’s chief legal officer Brad Smith said in a blog post Sunday. The company says it has now patched the vulnerabilities. The NSA, reportedly the author of the hacking tools behind WannaCry, has not yet responded. Elsewhere, the price of Bitcoin fell over 4% as the demand by the WannaCry hacker to be paid in the digital currency turned the spotlight back on the close ties between it and organized criminality. Microsoft

CEO Ethics Increasingly Under the Spotlight

CEO firings due to ethical lapses are on the rise.  A study from consultants PwC found that forced CEO turnovers for ethical lapses were 5.3% of all CEO successions in the last five years, up from 3.9% in the previous five years. The study attributes the rise to a public more suspicious of business, a tougher regulatory environment, changing media, and social media. The spread of the phenomenon was most pronounced in the so-called BRIC economies (Brazil, Russia, India and China), where ethics-related firings rose to 8.8% of the total and, albeit to a lesser extent, in the U.S., where they accounted for 3.3%. PwC

Waymo’s Enemy’s Enemy Is Its Friend

Alphabet’s estrangement from Uber appears complete. Google Ventures had been one of the ride-hailing company’s earliest backers, but Waymo, its autonomous driving project is now threatening to strangle at birth Uber’s efforts in that space, with a lawsuit alleging intellectual property theft. At the weekend, Waymo went a step further, signing a cooperation agreement with Uber’s biggest U.S. rival Lyft. The New York Times reported that the two companies will work together on pilot projects and product development, but offered few other details.  Fortune

Western Digital Throws a Wrench in Toshiba’s Plans

Toshiba, which filed for bankruptcy protection last month after its nuclear power strategy in the U.S. unraveled, reported a 950 billion yen ($8.4 billion) net loss for the year to March. That’s more than double the previous year’s $4.1 billion loss. The company hit fresh trouble at the weekend after Western Digital, a joint venture partner in the U.S., sued to stop it selling its chip business. Toshiba aims to cover its losses with the sale, but Western Digital says that a sale to any third party without its agreement would violate their JV deal. The suit will be heard by an arbitration court in San Francisco. Fortune

Summaries by Geoffrey Smith; @geoffreytsmith