8 | THURSDAY, AUGUST 1, 2019 THE NEW YORK TIMES INTERNATIONAL EDITION
business
Economists have produced a dizzying
array of estimates on the ultimate costs
of Brexit, and especially the disruption
to trade if confusing new customs
checks are established on both sides of
the English Channel. A no-deal Brexit
would leave the British economy 2 per-
cent smaller than otherwise by the end
of 2021, according to a recent report
from Oxford Economics, a research in-
stitution in London. The hit would be
twice as bad by the calculations of the
Office for Budget Responsibility, the offi-
cial British forecaster.
Major international companies have
over decades set up plants in Britain, ex-
ploiting its proximity to the single Euro-
pean marketplace. The more likely a
rupture, the less valuable Britain be-
comes as a base of operations.
None of this is new. Mr. Johnson has
merely intensified pressures that have
been at play since June 2016, when Brit-
ain shocked the world with its referen-
dum vote in favor of leaving the union.
The pound plunged more than 10 per-
cent against the dollar the next day.
Ever since, the pound’s value has served
as a gauge of Britain’s overall economic
prospects amid the bewildering wran-
gling over Brexit. Inflation resulting
from a weaker pound prompted house-
holds to limit spending, yielding slower
economic growth. Businesses have held
back on expansions. Major international
companies — Nissan and Honda among
them — have shifted production beyond
Britain.But if this has become a familiar tra-
jectory, Mr. Johnson has injected a sub-
stantial element of unpredictability.
His predecessor, the highly scripted
Theresa May, abhorred drama, even as
it consumed her tenure. Mrs. May ini-
tially claimed willingness to accept the
turmoil of a no-deal Brexit if the alterna-
tive was an unsatisfactory arrange-
ment. She then spent most of three
years trying to walk back that formula-
tion through negotiation, capitulation
and the finessing of previous positions.
Eventually, Mrs. May forged a com-
promise with Europe that was almost
universally panned. Those opposed to
Brexit denounced Britain’s departure
from the European single market, which
allows trade to proceed as if the Euro-
pean bloc were one enormous country.
Those favoring Brexit blasted Mrs.
May’s deal as a form of vassalage that
would prevent Britain from striking its
own trade deals with the rest of the
world. In a series of votes, Mrs. May’s
deal went down to defeat. Then she de-
parted, handing the tangled knot that is
Brexit to Mr. Johnson, a former journal-
ist whose factually deficient reports
from Brussels decades ago helped turn
the British public against the European
Union.
The new prime minister has a pen-
chant for finding the center of contro-
versy and an eagerness for headline-
capturing political fisticuffs. He took of-
fice vowing to end what he has por-
trayed as British deference in the face of
vindictive European inflexibility.
He would demand a reopening of ne-
gotiations and especially the scrapping
of an element of Mrs. May’s deal known
as the Irish backstop, a complex bit of
maneuvering designed to prevent the
reimposition of a border between North-
ern Ireland — part of the United King-
dom — and the independent Republic of
Ireland. The net effect was to keep Brit-
ain inside the European customs union
indefinitely and retain free-flowing
trade until the two sides work out a per-
manent arrangement that ensures no
hard border.
European officials have been resolute
that negotiations cannot be reopened,
while the backstop must endure. Thatleaves Mr. Johnson either headed to-
ward a collision with Europe or on the
verge of a politically perilous flip-flop.
Mr. Johnson has dismissed the risks
of a no-deal Brexit and insisted that he is
willing to crash out of the bloc at the end
of October if need be. During a tour of
the United Kingdom this week, he has
toggled between pugnacity and reassur-ance. On Monday in Scotland, Mr. John-
son was booed. He declared that there
was “every chance we can get a deal”
with Europe, but he also pronounced the
Irish backstop “dead” — an apparent
contradiction. The same day, Michael
Gove, a member of Mr. Johnson’s cab-
inet who is overseeing preparations for
a no-deal Brexit, said the governmentwas “operating on the assumption” that
this would be the outcome.
On Tuesday, sheep farmers in Wales
accused Mr. Johnson of imperiling their
livelihoods by jeopardizing exports to
Europe. A no-deal Brexit threatens
steep tariffs on lamb exports, they said,
raising the prospect of the mass slaugh-
ter of soon-to-be-unsellable animals.
Experts are divided on what is really
going on. Mr. Johnson may be bluffing,
seeking to force Europe to reopen talks
by convincing officials that he is not
afraid to crash out of the European bloc.
Or perhaps he is merely seeking to posi-
tion himself and his Conservative Party
as the victims of European intransi-
gence before national elections that are
likely to follow if Europe does not budge.
Or maybe he is intent on securing his
legacy as a hero among hard-core Brexi-
teers, the man who finally liberates Brit-
ain from killjoy European bureaucrats.
But if he pursues a no-deal exit to the
end, Mr. Johnson risks a mutiny within
the Conservative ranks. A few members
of Parliament could join the oppositionto bring down the government, and an
election would follow. If Mr. Johnson
pursues an unexpected compromise —
perhaps extending the Brexit deadline
or agreeing to a version of an Irish back-
stop — he risks a revolt from the other
side of his party.
No one knows what will happen, a
phrase that has gotten a vigorous work-
out since the Brexit referendum. Mean-
while, the markets are absorbing the
variables and coming away with a less-
than-robust appetite for pounds.
The moves in the currency markets
are now gradual, reflecting a continued
downgrading of sentiment, rather than
a meaningful change to the economy.
But as Oct. 31 draws closer, bringing the
cliff edge into sharp relief, the pound
could plunge.
“The currency markets are making
their own judgment that it will be bad for
the economy,” said Peter Dixon, a global
financial economist at Commerzbank
AG in London. “The more the rhetoric
gets cranked up, the more likely that
sterling comes under pressure.”Brexit and Johnson send the pound sliding
POUND,FROM PAGEPOOL PHOTO BY LORNE CAMPBELLPAULO NUNES DOS SANTOS FOR THE NEW YORK TIMES
Top, Boris Johnson has insisted that he is prepared to leave the European Union with-
out a deal. Above, a truck carrying Dutch flowers bound for Britain. The pound’s decline
effectively raises prices on British imports. Above left, a factory in Northern Ireland,
whose border with Ireland is a point of contention between Mr. Johnson and the union.ANDREW URWIN FOR THE NEW YORK TIMESSource: Refinitiv1.1.1.1.
Jan. Feb. Mar. April May June July$1.27 Mrs. May
says she will step
down, reviving
fears of a no-deal
Brexit.The British pound in U.S. dollars
THE NEW YORK TIMESThe markets are absorbing
the variables and coming away
with a less-than-robust appetite
for pounds.Trump administration officials are di-
vided over whether to give investors a
big tax cut that would primarily benefit
the rich before the 2020 election heats
up in earnest.
Republican senators and conserva-
tive anti-tax groups are increasingly
pushing the administration to use exec-
utive authority to deliver a tax cut to in-
vestors on profits they earn when sell-
ing assets like stocks or bonds. Such a
move would defy a legal opinion issued
in 1992 under President George H.W.
Bush and add an estimated $100 billion
to the already surging national debt.
Supporters of the plan include Larry
Kudlow, the director of President
Trump’s National Economic Council,
who is leading a White House task force
examining the proposal. Mr. Kudlow is a
longtime champion of the idea, which
would provide a tax break on profitsknown as capital gains. But the move
has skeptics, including Treasury Secre-
tary Steven Mnuchin, whose depart-
ment is bound by the 1992 opinion from
the Office of Legal Counsel, which deter-
mined that the Treasury Department
does not have the authority to index cap-
ital gains to inflation by regulation.
There is also a question of politics:
Democrats have already assailed Mr.
Trump’s $1.5 trillion tax cut as a give-
away to the wealthy. Some Republicans,
including senior Treasury Department
officials, have privately expressed
worry that a unilateral tax cut for invest-
ors would simply give Mr. Trump’s po-
tential 2020 rivals more fodder for those
attacks.
The plan under discussion would re-
quire the Treasury Department to
change the definition of “cost” for calcu-
lating capital gains, allowing taxpayers
to adjust the initial value of an asset,
such as a home or a share of stock, for
inflation when it sells. Such a move
would lower investors’ tax bills by effec-
tively reducing the profit earned on the
sale of their assets.
Brian Callanan, who is the depart-
ment’s deputy general counsel and has
been nominated as its next general
counsel, told staff members on the Sen-
ate Finance Committee before his con-
firmation hearing last week that thechange could not be made without a new
Justice Department memorandum de-
claring it legal.
“In a meeting prior to his hearing,”
said Ashley Schapitl, a spokeswoman
for Democrats on the committee, “Mr.
Callanan indicated to Finance Commit-
tee staff that he would adhere to the Of-
fice of Legal Counsel’s 1992 opinion that
the Treasury Department could not uni-
laterally index capital gains rates to in-
flation. If the Treasury general counsel
nominee doesn’t believe the department
has authority to unilaterally give the top
1 percent nearly $100 billion in addi-
tional tax cuts, that should put the issue
to bed.”
The Justice Department did not im-
mediately respond to a request for com-
ment.
Allowing Americans to account for
rising prices in determining their capital
gains taxes has been a long-held aspira-
tion for conservatives. Mr. Trump has
expressed support for the idea, which
would overwhelmingly benefit the top
0.1 percent of taxpayers, according to an
analysis by economists at the Penn
Wharton Budget Model, a research
group based at the University of Penn-
sylvania.
For months, anti-tax groups such as
Grover Norquist’s Americans for Tax
Reform have been pressuring theTrump administration to take action on
capital gains soon, before the politics of
additional tax cuts complicate Mr.
Trump’s re-election campaign.
The push took on new life this week
when 21 Republican senators, led by Ted
Cruz of Texas, sent a letter to Mr.
Mnuchin urging the move. “This treat-ment punishes taxpayers for the mere
existence of inflation and is inherently
unfair,” the senators wrote. “Indexing
capital gains to inflation is another clear
and sensible step on this path, and we
encourage you to use your authority to
effect this change.”
Proponents say the move would liftthe economy by giving investors more
money to spend. In their letter to Mr.
Mnuchin, the Republican senators cited
an investment surge in the immediate
aftermath of Mr. Trump’s signature 2017
tax cut legislation.
But critics argue that the administra-
tion could open the door to a variety of
unintended consequences, including al-
lowing investors to exploit the change.
Steve Wamhoff, the director of federal
tax policy at the Institute on Taxation
and Economic Policy, wrote in a June re-
port criticizing the proposal that index-
ing capital gains for just certain types of
assets, such as stocks, would create new
loopholes and tax shelters for investors
to game.
If Mr. Trump forges ahead and tries to
change the treatment of capital gains
without legislation, he would face swift
legal challenges.
Political blowback from his potential
2020 Democratic opponents is also a
certainty. Senator Kamala Harris of Cal-
ifornia has called for raising taxes on
capital gains so that they are taxed at
the same rate as ordinary income as
part of a way to pay for her “Medicare
for all” health plan.
Another Democratic presidential can-
didate, Joseph R. Biden Jr., also recently
said that current capital gains taxes
were “much too low.”Trump administration divided over big tax cut for investors
WASHINGTONSupporters want to index
capital gains to inflation,
which would help the richBY ALAN RAPPEPORT
AND JIM TANKERSLEYLarry Kudlow, the director of President Trump’s National Economic Council, is among
the proponents of a plan that would cut taxes on the profits made from selling stocks.ANNA MONEYMAKER/THE NEW YORK TIMEStaken from individuals’ Anthem health
care files, Equifax credit bureau
records, mortgage documents held by
the title services company First Ameri-
can, Yahoo email accounts and even fed-
eral employment records.
Security was, for decades, treated in
most industries as an annoying ex-
pense. Banks have always been an ex-
ception, with high budgets and fairly so-
phisticated security operations.
Mastercard, for example, has a win-
dowless bunker at its data center in Mis-
souri, where a group of security experts
work. Citigroup runs three cyberattack
response centers — in Budapest, New
York and Singapore — that give it round-
the-clock coverage. JPMorgan Chase
spends nearly $600 million a year on se-
curity, and Bank of America’s chief exec-
utive has said the bank’s security team
has a “blank check” for its spending.
But attackers keep slipping through.
Cybersecurity “may very well be the
biggest threat to the U.S. financial sys-
tem,” Jamie Dimon, JPMorgan’s chief
executive, said in an April letter to
shareholders. His company was the vic-
tim of a data breach in 2014 after hack-
ers exploited an employee password to
steal data on 76 million households.
The average cost of a security breach
in the United States has escalated in re-
cent years to $8.2 million, according to a
study by IBM Security and the
Ponemon Institute.
The cost for companies of Capital
One’s size can climb much higher, par-
ticularly when class-action lawsuits and
fines from regulators come into play.
The credit bureau Equifax said last
week that it would pay about $650 mil-
lion — perhaps much more — to resolve
most claims stemming from a 2017
breach that affected 147 million people.
Capital One said it expected to spend
at least $100 million this year respond-
ing to its breach. Some of that will be off-
set by the bank’s cybersecurity insur-
ance, which can cover as much as $
million in losses. A lawsuit seeking
class-action status was filed against
Capital One on Tuesday.
The breach is particularly embarrass-
ing for Capital One because it was one of
the first big financial institutions to
move its systems to cloud computing.
The company functioned almost like a
“proof of concept” for regulators looking
to see if the migration to the cloud could
be done securely, Mr. Kellermann said.
The bank wore its cutting-edge ap-
proach as a badge of honor. “Everything
new” built by the company’s developers
was on Amazon’s infrastructure, Rob Al-
exander, Capital One’s chief information
officer, told the trade publication Infor-
mation Week in December. “We are en-
tirely focused on moving to the public
cloud,” he said.
Cybersecurity experts wondered why
the company’s security defenses had
not picked up Ms. Thompson’s intrusion.
Most financial institutions use technol-
ogy that can detect unusual patterns of
behavior indicating that a user could be
trying to rob the bank.
Capital One learned about the attack
from an outsider about three months af-
ter it happened. On July 17, the company
got an email that tipped it off to leaked
data posted on the coding platform
GitHub, according to court documents.
“Let me know if you want help track-
ing them down,” the person who raised
the alarm wrote in the email to the bank.
Others may have followed the same
path that prosecutors say Ms. Thomp-
son did, Mr. Kellermann said. “There is
no way that same back door wasn’t
available to other people during that
time.”Big banks
trapped in
endless fight
with hackers
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