The Aug. 2 deadline to raise the nation’s debt ceiling cast a pall over markets Wednesday, driving the Dow Jones Industrial Average down 198.75 points as Mike Duke, Wal-Mart Stores Inc.’s president and chief executive officer, warned a U.S. default would be “devastating” for the economy.
This story first appeared in the July 28, 2011 issue of WWD. Subscribe Today.
Testifying before the Senate Finance Committee on Capitol Hill, the ceo of the world’s largest retailer told lawmakers he is concerned about the impact a U.S. default would have on the 106 million customers who shop in his stores weekly.
Several competing plans have been put forward to avoid a default by raising the U.S. borrowing limit while cutting government spending and boosting revenues, but a consensus has yet to crystallize in Washington. If lawmakers don’t reach a deal and the U.S. runs out of money to pay all its bills, interest rates could rise.
“Higher interest rates clearly would have an affect on consumption,” Duke said. “The ability of the consumer to regain confidence, to start reinvesting themselves as families across America is important. A default and the ripple effect I think would be impactful and, representing our consumers, we think that would be very, very difficult for the American economy to withstand at this point in time.”
Duke said shoppers are still uneasy.
“When I talk to customers shopping in our stores, I’m not getting the sense of confidence [from them],” Duke said. “With the situation in the economy, with the job situation and other factors facing consumers, I think a default at this time would be devastating.”
As the gridlock in Washington drags on, Wall Street is growing increasingly nervous. The day’s tumble left the Dow down 1.6 percent at 12,302.55. The S&P Retail Index fared somewhat better, falling 1.1 percent, or 5.75 points, to 539.89.
Among the retail decliners were Abercrombie & Fitch Co., down 4.5 percent to $73.60; American Eagle Outfitters Inc., 4 percent to $13.24; Tiffany & Co., 3.1 percent to $79.05; Saks Inc., 3.6 percent to $10.82, and Nordstrom Inc., 3.3 percent to $49.23. Shares of Wal-Mart declined 0.6 percent to $53.25.
The Jones Group Inc. ran countertrend, rising 16.3 percent to $12.91, after the firm posted better-than-expected second-quarter profits.
Turning to other economic issues facing the U.S., Duke also urged lawmakers to dramatically lower the country’s overall corporate tax rate, arguing it would allow multinational companies to better compete globally and support more businesses and jobs at home. Duke testified on a panel with other ceo’s at a Senate Finance Committee hearing examining how the current tax code impacts hiring and business growth in the country and how it can be reformed to support more job and business growth.
Sen. Max Baucus (D., Mont.), chairman of the committee, said with the unemployment rate hovering around 9 percent, the business community has an “obligation” to hire more people and jump-start the economy. Lawmakers have been considering overhauling the tax code for the past year and, as the economy continues to weaken, their attention has focused on reform as part of a broader effort to create jobs.
“In today’s global economy, we simply can’t afford for the tax code to hamper businesses’ ability to compete and create jobs here at home,” Baucus said. “We need corporate tax rules that encourage job creation and widespread economic growth.”
Duke, who called for the federal corporate rate to be lowered from the average 35 to 39 percent to the “mid 20s” percent range, said Wal-Mart paid $4.7 billion in corporate taxes in the U.S. last year, a 32.2 percent effective corporate tax rate, representing about one-third of all corporate incomes taxes the Treasury Department collected.
“We’re not here to ask for sympathy,” Duke said. “The question is not whether Wal-Mart as a company can get by under the current tax structure. The real question is whether this structure is the best approach for our country. We believe that it is not.”
Wal-Mart operates 4,400 stores and clubs in the U.S., employing about 1.4 million people, and Duke said every new store it builds domestically or opens abroad supports U.S. jobs. He added that the company will invest more than half of its $12.5 billion to $13.5 billion in capital expenditure budget in the U.S. this year alone to grow its business.
“Our international growth allows Wal-Mart to source more goods from U.S. companies to sell in our stores around the world,” Duke said. “Seventy percent of our top international suppliers are U.S. companies, which creates and sustains American jobs.”
But he argued that Wal-Mart is put at a considerable disadvantage in global markets with foreign competitors such as U.K.-based Tesco because of the tax code in the U.S. Duke said in China, Tesco pays a 25 percent Chinese tax rate on its profits but does not pay additional tax when it brings the money back to the U.K. Wal-Mart, on the other hand, pays the 25 percent Chinese tax rate and an additional 10 percent rate on its profits when it repatriates the money.
“The result is that we are often outbid for retail sites because companies with lower overall tax rates have a lower cost of capital,” Duke said. “When we do win, we pay more overall.”
Duke and three other ceo’s testifying before the committee called for the U.S. government to move toward a “territorial tax system,” one that does not tax profits made outside of the U.S. Under current U.S. tax law, generally all of a corporation’s profits are taxable, regardless of where they are made. Duke said the “keys to reform” include lowering the corporate tax rate, eliminating existing incentives that “benefit some industries over others” and leveling the international playing field with a territorial tax system.
Larry Merlo, president and ceo of CVS Caremark Corp., said the company, which operates 7,200 CVS/Pharmacy stores and employs 200,000 people in the U.S., reinvests $2 billion into its business each year. Merlo said a reduction in the corporate income tax rate would allow the company to “accelerate” its investment in the U.S. Merlo, echoing Duke and the others on the panel, said although CVS Caremark benefits from some of the current tax incentives, such as the Work Opportunity Tax credit and accelerated bonus depreciation, it would forgo or reduce these incentives in exchange for a much lower corporate tax rate.