Good morning.
The Republicans unveiled a hugely ambitious tax plan yesterday that will become the focal point of activity in Washington for months to come. Having covered the 1986 reform effort, I can attest that these debates take a long time, make for a wild roller coaster ride, and usually end up far from where they started.
But the best breakdown of the starting point can be found this morning on the web site of the Committee for a Responsible Federal Budget. Despite the lack of available detail, their rough estimate is that it would cut taxes by $5.8 trillion, and offset it with about $3.6 trillion in “base broadening.” Net cost: $2.2 trillion over ten years.
For business, the plan holds out the tantalizing prospect of a 20% corporate tax rate and a territorial tax system that would eliminate the double taxation of overseas earnings. But there is one very big offset—a limitation on corporations’ ability to deduct interest payments.
There also are a lot of unanswered questions. The Wall Street Journal’s Richard Rubin highlights three of particular importance to business:
- The outline is silent on whether the limitation on interest deductions also applies to non-corporate businesses—a big deal to real estate, agriculture, and private equity.
- On international taxes, the plan refers to rules that would tax a company’s foreign profits “at a reduced rate and on a global basis.” That sounds like a minimum tax on multinational profits, anathema to many big companies.
- The taxation of so-called “pass-through” businesses at a 25% rate creates a massive incentive for affluent taxpayers with clever accountants to try and convert their wage income into business income. The plan refers to rules that would prevent such game-playing, but the devil is in the details—and those details could have a profound effect on car dealers, accountants, lawyers, doctors and others who operate as pass through businesses.
So, big fights ahead. Given Washington’s political dysfunction these days, don’t hold your breath waiting for resolution. The only certainty is that it will be a good year for the lobbying business.
More news below.
Alan Murray @alansmurray alan.murray@fortune.com
Top News
•Toshiba Signs, Apple Smiles and Western Growls
Toshiba finally signed a deal to sell its memory chip business for just under $18 billion to a consortium led by Bain Capital and South Korean chipmaker SK Hynix (and including Dell and Apple). The deal had been held up at the last minute by Apple’s insistence on guarantees regarding chip supply in return for its backing, Reuters reported. Toshiba faces de-listing if the deal isn’t completed by March. That could be a tall order given outstanding litigation from Western Digital and antitrust reviews in numerous jurisdictions. Fortune
•Google’s EU Appeasement Fails to Convince
Google said it will spin off its European shopping business and let rival shopping comparison services advertise on its search results pages, a move aimed at complying with the EU’s antitrust complaint against it. It promised to force its own shopping service to bid on an equal basis for advertising space. Competitors weren’t impressed, arguing that such auctions were still biased in Google’s favor, as it could internalize the cost of the ads. How the EU Commission views the remedy is likely to have a big influence on its thinking with regard to the—for Google much more important—question of whether it abuses its control over the Android system. Bloomberg
•Here’s What You Missed While Watching Kim and Trump
Has the world been looking at the wrong crisis? The focus on the U.S.’s showdown with North Korea has overshadowed the fact that Iraq may be about to blow up again. The autonomous region of Kurdistan said Wednesday that 92% of its people had voted for independence in a referendum opposed by Baghdad, as well as by Turkey, Syria, and Iran, which all have their own restive Kurdish minorities to worry about. The U.S. had also urged the region not to hold the vote, aware of the result it would produce. The only silver lining is that the very real risk of conflict puts the squabbling in Spain over a Catalan independence referendum planned for Sunday into a more palatable context. Time
•Exxon Bets Big on Brazil
Exxon Mobil placed a big bet on Brazil’s offshore oil sector, buying up 10 exploration blocks for nearly $1.2 billion. Prior to the auction round, it was the only one of the global majors without a significant presence in Brazil’s promising but expensive-to-develop sector. The investment reflects the need by oil and gas majors to ensure they have large-volume projects to satisfy still-growing global demand. The decline of similar existing projects around the world is one of the reasons that the surplus on the global market is expected to disappear by next year. Reuters
Around the Water Cooler
•Who’s Afraid of the IPO?
Not Roku, nor its investors. The maker of smart TVs and set-top boxes priced its initial public offering at $14, the top end of the bookbuilding range, valuing the company at $1.3 billion. That’ll raise $126 million in new equity and give selling shareholders $93 million. Not bad for a company that’s still losing money and wants to transition away from the business that people most associate with it. Thanks to the company’s dual-class stock structure, the new shareholders who own 10% of the company will have 2% of its voting rights. Fortune
•Ahead in the Cloud, For Now
A survey by Gartner suggested that Amazon Web Services still has a huge lead in ‘Infrastructure as a Service,’ a business category category that includes basic computing, data storage, and networking services that companies can rent as needed. AWS grew more, in absolute terms, than Google and Microsoft’s offerings combined last year. In percentage terms, however, AWS’s growth was outstripped by both of those two and, notably, by Alibaba, which is now in 3rd place behind Microsoft. The data look ominous for ‘purer’ Cloud plays like Rackspace, whose revenue only grew 2.2% last year. Fortune
•Don’t Blame Us for AfD, Says Facebook
Forewarned was forearmed, as far as Germany’s battle with fake ads and fake news during its election campaign was concerned. Facebook said Wednesday it removed more than 20,000 fake accounts during the campaign. It also said that tweaks to its algorithms had markedly cut down clickbait and spam entering customers’ news feeds. Which ought to make it harder for the establishment parties to blame social media for rise of the populist right-wing AfD, which got 12.6% of Sunday’s vote. Facebook executives said they would apply the lessons learned in future elections. For the U.S., that’s the gubernatorial elections for Virginia and New Jersey on Nov. 7. Fortune
•Take Me To Your LiDAR
Senators said they’ll release a text Thursday of a bipartisan proposal aimed at accelerating the development of self-driving cars. The bill will reportedly give federal authorities the power to approve cars without human controls, if they deem them safe, but won’t include such powers for self-driving trucks. On the same subject, Fortune’s Kirsten Korosec interviewed Austin Russell, founder of Luminar, a pioneer in the laser-based sensor technology that enables vehicle autonomy, whose products are central to the plans of Toyota, among others. You can read her article here. Fortune
•Now You Can Read it for the Obituaries, Too
Hugh Hefner, whose Playboy empire symbolized both the sexual revolution of the 1960s, died aged 91. Hefner’s phallocentric embrace of hedonism and consumerism were once at the cutting edge of both the media and entertainment industry, but look wildly out of place today. According to the FT, Hefner some years ago bought a burial plot next to Marilyn Monroe, who appeared in the first edition of the magazine that made his fortune. Marilyn, typically, had no say in determining whom she rests next to. Fortune
Summaries by Geoffrey Smith; geoffrey.smith@fortune.com
@geoffreytsmith
