Spending on hourly wages just a sliver of what it could save in tax
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By John Foley
NEW YORK (Reuters Breakingviews) - Walmart’s new pay hike, purportedly inspired by the recent cut in the U.S. corporate tax rate, is a little less than real largesse. The U.S. supermarket chain’s extra spending on hourly wages is just a sliver of what it could save in tax, though – and a tight labour market is likely to have been a more potent driver.
The $300-billion retailer (all dollars US) will raise its hourly rate for starting-out staff to $11 in the United States, the third upward move in three years. Assuming a 40-hour work week, the $300 million increase the company expects in its wage bill would suggest fewer than one in 10 U.S. staff will benefit directly. Put another way, the new increment is equivalent to just 0.3 per cent of the company’s sales and administration costs.
Moreover, the reduction in the corporate tax rate to 21 per cent from 35 per cent means CEO Doug McMillon in theory had room to give away much more. The company is forecast to make $20.3 billion of pre-tax profit in 2018. Around three-quarters of that comes from the United States, which suggests a tax saving of $2.1 billion. Factor in the one-off bonuses the company is paying to some staff, at a total cost of $400 million, and the Beast of Bentonville is giving back only around one-third of what it could save in tax.
In fairness, there are other demands on Walmart’s tax windfall. Competition from rivals and online behemoth Amazon are going to call for investment in stores and lower prices. On the same day the company trumpeted its pay rise, it revealed the closure of some members-only Sam's Club stores. So competitive is the market that Morgan Stanley reckons in most cases only 50 percent of what retailers save in tax will make it back to investors.
The wonder, even so, is that Walmart didn’t do more. It said in 2016 it was investing $2.7 billion in staff over two years. At the time neither a tax cut nor such a low jobless rate were in prospect. Now that unemployment is at its lowest since 2000, the company would probably have needed to raise wages anyway. Neither tax nor benevolence has much to do with this minor act of redistribution.
CONTEXT NEWS
- Walmart said on Jan. 11 that it would raise its starting hourly wage to $11, at a cost of $300 million a year, starting in February. It will also pay a one-time bonus to some staff at an additional cost of $400 million. Full-time staff will also get an expanded parental-leave policy, as well as financial assistance for adopting a child.
- Walmart, which employs more than 1.5 million people in the United States, increased the starting hourly wage to $9 in 2015, and $10 in 2016. In January 2016 it said it would invest $2.7 billion over two years in its U.S. workers.
- The U.S. corporate tax rate was cut from 35 percent to 21 percent in a bill passed by Congress in December. In the year to January 2017, Walmart provided for $6.2 billion of tax on pre-tax income of $20.5 billion, a rate of around 30 percent. In the same year, the company said it returned $14.5 billion to investors via dividends and share buybacks.
