Leading the conversation: Buffett's controversial call for Congress to stop "coddling" the super-rich and raise tax rates for the wealthiest Americans.
This is a transcript of the entire program, courtesy the Charlie Rose program:
CHARLIE ROSE, HOST: Welcome to our program.
Tonight from Omaha, Nebraska, a conversation with Warren Buffett; his op-ed piece in today’s "New York Times" argues that we should stop coddling the rich, that the rich like him should pay more taxes. A conversation about taxes and spending with Warren Buffett.
(BEGIN VIDEO CLIP)
WARREN BUFFETT, CHAIRMAN AND CEO, BERKSHIRE HATHAWAY: I think -- I think it’s important that whatever is done restores to a degree -- and we can’t do it overnight -- but restores to a degree people’s faith in the fact that their government can work.
Now, I also think fairness is important and I think getting rid of promises that you can’t keep is important. I don’t think we should cut spending dramatically now. I don’t think that what I’m talking about on taxes solves the -- the deficit gap at all. But I think fairness is important. I think having a sensible long-term plan is important to explain and I think having it be believable is terribly important because people don’t believe these out year things generally with Congress. They see too much of what’s happened.
ROSE: Is part of this -- being in the position that you’re in you want to start a conversation about the reality of taxes.
ROSE: And the reality of balance and fairness.
BUFFETT: Yes. I think it’s -- I think the American people deserve to be educated on what fellows like me are paying in taxes, for example. But they have to be educated on the reality of future promises. They have to be educated on the necessity of running significant deficits when the economy is weak. I mean, there’s a lot of things in terms of economic education. But this is the time to do it. If we don’t do it now, if these 12 members who have been appointed now to the super committee --
BUFFETT: -- if they come back with something that’s a lot of mush, you know, the American public’s had it.
ROSE: And what happens to the country?
BUFFETT: It isn’t good. It isn’t good. The country will still come through, believe me.
BUFFETT: We can -- we will -- we’ll rise to whatever occasions -- occasion demands eventually. But we are wasting so much in the way of potential output, in terms of the opportunities for people that we ought to get on with it. I mean, the job of government is to govern.
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ROSE: Warren Buffett for the hour. Next.
ROSE: We are in Omaha, Nebraska, for a conversation with Warren Buffett. Like so many people, I got up this morning in New York and read "The New York Times" editorial page and I found the following column written by him. It is an op-ed which is called "Stop coddling the super rich." Here are some excerpts.
"Our leaders have asked for shared sacrifice, but when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting, they, too, were left untouched. While the poor and middle-class fight for us in Afghanistan and while most Americans struggle to make ends meet, the mega-rich continue to get our extraordinary tax breaks."
Buffett speaks directly to the newly-designated 12-member super committee of Congress outlining the stakes for the country.
"Americans are rapidly losing faith in the ability of Congress to deal with our country’s fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness. That feeling can create its own reality."
He spoke to spending as well as taxes saying: "Job one for the 12 is to pare down some future promises that even a rich America can’t fulfill. Big money must be saved here."
And then he turned to his theme of taxes on the rich. "The 12 should then turn to the issue of revenues. I would leave rates for 99.7 percent of taxpayers unchanged and continue the current two percentage-point reduction in the employee contribution to the payroll tax."
His argument is specific. "For those making more than $1 million -- there were 236,883 of them in 2009 -- I would raise rates immediately on taxable income in excess of $1 million including, of course, dividends and capital gains. And for those who make $10 million or more-- there were 8,274 in 2009 -- I would suggest an additional increase in rate."
So there it is. At a time of great political debate about taxes and spending, one of the richest people in the world looks at his country and says people like him should pay more taxes.
Warren Buffett joins me now to talk about his column, the U.S. economy, the global economy, the deficit and the debt and what he thinks we should do about taxes.
I am pleased to have another conversation with my friend Warren Buffett.
BUFFETT: Good see you, Charlie.
ROSE: All right. Let me -- this is not a new idea for you.
BUFFETT: No, it’s not a new idea. It’s -- I’ve done this three times in terms of checking in my office and every time I come out to be the low taxpayer but this time I got a little more upset than usual.
ROSE: So you got more upset and decided you wanted to write and express what central idea?
BUFFETT: Well, we’ve been hearing about shared sacrifice. And believe me the people out there know what they’re talking about on that. I mean there is sacrifice going on all over this country and we’re talking about people making sacrifices about the promises that have been made to them in the future on some entitlements.
So I decided to look around and see if any of my friends were being affected by shared sacrifice and they, like me, are enjoying these extremely low tax rates and then in the very high percentage of these cases the very rich are paying less in the way of taxes than the people that clean their offices.
ROSE: Between a ten-year-period, the rich -- the rate they were paying has gone down and more of them have much larger taxable income.
BUFFETT: Yes, well, the IRS publishes statistics. They’ve done that since 1992. About the top 400 earners in the country -- it’s not the same every year. Those earners have had their income since 1992 quintupled. Now, I don’t know very many of our listeners that have had their earnings quintupled. During that same period, their tax rates have gone down from 29 and a fraction percent overall to 21 and a fraction percent.
ROSE: You are also in favor of spending cuts.
BUFFETT: We have to, Charlie. I mean we -- we are a very, very, very rich country. We’ve got close to what -- $48,000 of GDP per capita. If you told me when I was a kid that that would happen I would have thought you lost your marbles. But we had -- even a rich country has limits and we have promised things that we can’t deliver on and that’s a mistake. But we’re also in the process under-taxing the very rich. What I propose, incidentally, would not touch the taxes of 99.7 percent. I’m talking about three-tenths of one percent of the American public. But the people from a million dollars on up I think should be asked to share in a little of the sacrifice that we’re being asked to share in.
ROSE: What’s the formula are you looking for?
BUFFETT: Well, I think -- what really gives the low rates to the very rich like me is the -- is the low tax on dividends and capital gains. If you take these rich people what the IRS singles out, from 1992, they’ve almost had a tenfold increase in capital gains. They’ve had a tenfold increase almost in dividends. And those -- those are taxed at 15 percent and there’s no payroll tax on it. Now, the payroll tax accounts for almost as much revenue to the government as the income tax. It’s close -- $800 billion plus on payroll taxes last year; about $900 billion on income taxes. That’s where the money comes from in Washington. And they don’t get any payroll tax to speak of on my income. I’ve got my tax return here.
ROSE: We’ll take look at them in a moment.
BUFFETT: And -- and they -- they get -- I get taxed on up to $100,000. And -- and -- and my super rich friends get taxed up to $100,000. And that tax hits the people in my office very, very hard. Often they have a spouse working, so they get taxed on up to $200,000 that payroll tax. And that’s at -- this year we’ve had a waiver of two points but that’s normally at 15.3 percent. That alone is higher than the tax rate on capital gains or dividends.
ROSE: You point out that the average tax rate for people in your audience -- in your -- the average rate for people in your office is 36 percent of taxable income.
BUFFETT: Yes, 36 percent. And nobody’s below 33 percent. And incidentally, the lowest income person in the office is higher than the 33 percent. They don’t have the low rate. So from 33 percent to 41 percent they range and they average 36 percent and I’m in there with a fat 17.4 percent I think it is.
ROSE: And why is that?
BUFFETT: Well, taxes -- if you make money with money, you get taxed very -- at very low rates; 15 percent dividends in capital gains. No payroll tax. If you make money with muscle or hard work or sweat of your brow, you get taxed at rates that move on up. And most of the people, the middle-class gets taxed at rates of either 15 percent or 25 percent on their income tax, but then they get really hit hard on the payroll tax and that’s what brings the rates in our office up to an average of 36 percent if you leave me out.
ROSE: What has happened to the tax rate for the lowest 20 percent?
BUFFETT: The poor don’t pay any.
BUFFETT: I mean there -- there’s 80 plus million actual taxpayers that pay tax. Incidentally, some of the extremely wealthy don’t pay, but that’s just an aberration. But no, the taxes -- taxes are falling -- the high rates are falling on the middle-class and the upper middle-class.
ROSE: The argument is sometimes made by people who believe that it is always good economic policy to reduce taxes that if, in fact, you reduce taxes you will create economic expansion and economic growth. People will go out and create jobs if they’re not paying as much taxes. People if they’re paying a higher tax will not make as many investments.
BUFFETT: Well, I worked with investors for 60 years, small ones, large ones, super large ones.
BUFFETT: I have yet-- and I’ve worked with capital gains rates of 39.9 percent and 36 percent and 25 percent, I have yet to hear one person say to me, "If I call you in the middle of the night Charlie and I say Charlie I’ve got this hot investment idea." Your reaction is not to say "No matter what the tax rate, forget it, I’m going back to sleep because the capital gains rates are too high." No, what you’re going to do is you’re going to say, "Tell me the name, quick, Warren, before you change your mind." And you know, I have never had one person decline to invest with me.
BUFFETT: And I was running money 40, 50 years ago when rates were much higher and I never had one person to show the slightest reluctance to take an investment idea and run with it.
ROSE: What are the other reasons that for -- that is essential to do now?
BUFFETT: Well I think it is essential. I think people are very, very upset about how their government works and particularly how it worked during this raising the deficit ceiling period. I mean, so as I talk to people, they’re very disillusioned. Howard -- Howard Schultz of Starbucks --
BUFFETT: -- came out with an article just the other day on that. So I think -- I think it’s important that whatever is done restores to a degree -- and we can’t do I overnight, but restores to a degree people’s faith in the fact that their government can work.
And I also think fairness is important and I think getting rid of promises that you can’t keep is important. I don’t think we should cut spending dramatically now. I don’t think that what I’m talking about on taxes solves the -- the deficit gap at all. But I think fairness is important. I think having a sensible long-term plan is important to explain and I think having it be believable is terribly important because people don’t believe these out year things generally with Congress. They see too much of what’s happened.
ROSE: Is part of this -- being in the position that you’re in you want to start a conversation about the reality of taxes.
ROSE: And the reality of balance and fairness.
BUFFETT: Yes. I think it’s -- I think the American people deserve to be educated on what fellows like me are paying in taxes, for example. But they have to be educated on the reality of future promises. They have to be educated on the necessity of running significant deficits when the economy is weak. I mean there’s a lot of things in terms of economic education. But -- but this is the time to do it. If we don’t do it now -- if these 12 members who have been appointed now to the super committee --
BUFFETT: -- if they come back with something that’s a lot of mush, the American public’s had it.
ROSE: And -- and what happens to the country?
BUFFETT: It isn’t good. It isn’t good. The country will still come through.
BUFFETT: Believe me. We can -- we will -- we’ll rise to whatever occasions -- the occasion demands eventually. But we are wasting so much in the way of potential output, in terms of the opportunities for people. But we ought to get on with it. I mean the job of government is to govern.
ROSE: Let me go t the debt ceiling debate and just talk about it for a moment.
BUFFETT: It’s just like -- let’s -- let’s just say, Charlie, that you and I agree that after we left the studio here we were going go out to a track near here and I was going to get at one end with my car and you were going to get at the other end and there’s this line down the middle and whichever one flinches loses his net worth to the other guy. Do you want to play?
BUFFETT: What do you want to play depends on how crazy you think I am.
BUFFETT: So what do we do if we go out there? Your net worth is on the line and my net worth is on the line and the engines are revved up, you know. And I make all these menacing gestures at you. I tried to look like a --
ROSE: You make me think you’re crazy.
BUFFETT: Oh yes, yes, absolutely. Absolutely. And you’re trying to make me think I’m -- you’re crazy. And we both get in our cars and we don’t think the other guy is crazy.
BUFFETT: So what do we do? Right as the engines start, I throw out my steering wheel. Now you believe me, right? Well, Boehner didn’t throw out the steering wheel, McConnell didn’t throw out the steering wheel but a group behind them said "Throw out the steering wheel, Mr. Speaker and make those people realize that we’re not going to agree to anything unless we get our way." And -- and if you have a sane person dealing with somebody that you feel may be insane, by that point when they draw the steering wheel you feel they’re insane "you lose". And the American people lost, incidentally.
ROSE: Then along came Standard & Poor’s and basically downgraded.
ROSE: -- because they said it appears that the U.S. Congress is dysfunctional and unable to deal with the issue.
ROSE: You disagree with the downgrading?
BUFFETT: A 100 percent. I mean --
ROSE: But you understand why they made the decision?
BUFFETT: Oh I understand why they did it. But I will bet you -- McGraw-Hill owns Standard & Poor’s.
BUFFETT: I bet if they have any short-term money around it’s in Treasuries. I don’t know that for sure but they would not be worried about it that being in Treasuries.
ROSE: And that’s, in fact, what happened the Treasuries --
BUFFETT: The Treasuries -- we can print money. There are 17 countries in Europe that gave up the right to print money and believe me, they don’t want to give up the right to print money.
ROSE: Because they joined the Euro zone.
BUFFETT: Yes they joined the Euro zone and now they -- they’ve got terrible problems because they can’t print money. We -- we can print money. We don’t -- we don’t have to worry so much about our government becoming dysfunctional as we have to worry about that damn printing press becoming dysfunctional.
ROSE: So in fact you are saying that the United States can always pay its bills and therefore it should not have had its AAA rating downgraded?
BUFFETT: Yes, that’s correct.
ROSE: Yes. But what about -- what do you make of the Chinese criticism?
BUFFETT: Well, I -- I’m sure they’re enjoying it in a way.
BUFFETT: I mean, they -- well I would criticize too, because if I were the Chinese sitting with a $1 trillion plus of U.S. government obligations one way or another, I would be very worried about what’s going to happen to the purchasing power of that. I mean I’ve got the right to get the $1 trillion back and I will get the $1 trillion back. The question is what will it -- what will it buy at that time? And our government gives you the impression at times that if they will resort to a printing press. They’ll resort to a printing press if necessary. And if they do enough of that, the value of the dollar goes down and it goes down significantly. So if you hold a lot of dollars which the Chinese do -- I can see getting unhappy about that.
ROSE: What do you think of the Federal Reserve’s announcement they’re going to keep interest rates low?
BUFFETT: Well, that’s a very, very stark statement. I mean the fed is saying, when they say we’re going to keep the rates low until 2013, that they say -- they’re really saying the economy is not going to be very good until then. That’s a -- that’s -- it’s an unusual statement.
ROSE: Would you disagree with it?
BUFFETT: I -- I think there’s a chance they’re wrong, yes. I think that -- I think it may pick up before then.
ROSE: Do you think the U.S. economy will pick up before then?
BUFFETT: Yes, the U.S. economy. I think it’s -- well, it’s been picking up ever since the summer of 2009. Right up until last month. I mean I -- I -- I see figures on 70 plus businesses. What is unusual about this is we had a huge recession caused in large part by a housing bubble. I mean, you had -- you have 67 percent of the people in the United States own their own homes roughly.
BUFFETT: And those people who have a $22 trillion asset at the peak saw the value shrink dramatically. That’s -- that’s affecting two-thirds of the households in the United States. That had had incredible impact on the economy and we won’t come back big time until we’ve worked off the excess inventory that was created during our binge on housing a few years back. We are -- we are making progress on that every day, every week, every month. I mean, we are producing less houses than we are households.
ROSE: The household formation has to increase beyond --
BUFFETT: Beyond the housing construction. And that’s been happening for a couple of years and it’s exactly what should happen. Now, I actually read some article today by people talking about blowing up a few houses or something. If you blew up a million houses you’d probably be in balance now. I’m not advocating that, right. And if you started having households being formed by 12-year-olds you -- you -- you could speed up household formation. But we’re not going to have that either. But we are going to have households being formed. That’s baked into the demographic pie.
ROSE: You are saying that what’s wrong with the American economic growth picture right now is housing and construction --
ROSE: -- and -- and --
BUFFETT: Every one of our businesses virtually or our 70 something businesses are doing better quarter by quarter by quarter except those tied to housing.
ROSE: Keeps on paying in things like that.
BUFFETT: But housing -- housing is way bigger than construction workers. Unemployment will fall significantly in my view when we get back up to a million housing starts because it won’t just be construction workers, it will be our carpet workers where we’ve laid off 6,000 people, and it will be our brick workers. And go up and down the line. So the big recovery -- we’ve recovered our corporate profits. We’ve recovered in terms of -- of getting the banks back in shape, banks are in good shape now. We’ve recovered in all kinds of areas.
Corporate America is doing fine in most areas. It’s not doing fine in things tied to residential construction. That won’t come back until we work off the excess inventory. But the inventory is not as -- the amount of excess inventory is not as high as a lot of people think in my judgment and that’s why I say it could be before mid-2013.
ROSE: Going down to eight percent or something?
BUFFETT: And I think it’s -- and I think if -- when -- when home construction is a million units or more running at that rate, I think we’ll be at seven percent or below.
ROSE: You have a bit -- a bet with Peter Orszag, the former Director of the Office of Management and Budget?
BUFFETT: Yes, but I’m talking settlement with him.
ROSE: What was the bet?
BUFFETT: The bet -- the bet was on by election time that it would be down to 7.3 percent and I thought -- I thought housing construction would come back by that point.
BUFFETT: And I may be wrong. I may be right but --
BUFFETT: -- but when -- I will guarantee you when housing construction gets back to a million units -- and it can go beyond that.
ROSE: Right, right, right.
BUFFETT: I mean it could even be a million or two, we will have -- and unemployment will fall dramatically.
ROSE: To six percent at some point?
BUFFETT: Well, certainly below seven percent.
ROSE: Below -- oh, close to six.
BUFFETT: Yes, yes.
ROSE: By 2013?
BUFFETT: Oh, I -- I think -- I think it’s likely to happen -- the Federal Reserve disagrees with me.
BUFFETT: And Bernanke is a lot smarter guy about that than I am. But -- but I -- we are working it off. I mean we have -- we have never had this low a level relative to population --
BUFFETT: -- for as long as I’ve known the figures on. I mean this -- this is a huge correction of a bubble that popped.
ROSE: And -- and what is necessary to take place over the next two years in order to increase household formation and decrease the amount of construction?
BUFFETT: Well, we’re doing pretty well on the decrease in construction.
BUFFETT: We’ve -- we have not done --
ROSE: Demand is a factor in that.
BUFFETT: Demand is a factor and we artificially gave it a little boost when we went with the credit a year or two ago on -- on -- on purchase of homes. I think it’s a mistake to try and -- to try and front end it. I mean it just delays the eventual recovery. If you’ve gone in excess of something -- if I’ve got too many purple dresses and I run a dress shop, I get rid of those purple dresses and -- and then I can start all over again with the dresses that the people want.
BUFFETT: And I -- I mark them down to whatever it takes. You could -- you could -- you could have -- you could have a bunch of rich immigrants come in and they’d all need houses, for example. I mean if you wanted to change your immigration policy so that you let 500,000 families in but they have to have a significant net worth and everything, you’d -- you’d solve things very quickly. But naturally it’s being solved. Capitalism is solving this. But we’re fortunate in doing this, Japan has a declining population. I mean, if they get in excess of something it isn’t going to get worked off. We have households being formed every day. I’ve got a grandson getting married this weekend so we’re -- we’re forming them all the time. And -- and we’re forming it a lot faster than we’re building homes.
ROSE: And we have an economy that’s based on domestic demand.
ROSE: Yes whereas China was trying to shift around from an export
demand to a -- to a domestic demand.
BUFFETT: Yes, they will be a strong exporter for a long time.
ROSE: When you -- when you look at economic growth first there’s a job question but then there’s also the rate of economic growth, increase in GDP. How do you see that?
BUFFETT: I think it will be -- I think it will be very good over time. I mean I -- I -- we have -- we have the same things that have been working for us for 200 plus years. We -- we -- Charlie, I was born on August 30, 1930. That was the high day of the Dow Industrials in that year. It was at 242. They’d come back people thought that they make that we’re going to recession.
ROSE: Right, sure.
BUFFETT: What happened the next couple years? And 4,000 banks closed, the Dow went to 41; that’s like the present Dow going to 2,000. My dad lost his job we had the dust bowl here and everything. We’re living six times better than now.
The American system works. It works terrifically and -- and it has -- it has occasional recessions. I mean we’ve got -- probably had 15 of them since the country was formed and this was a particularly bad one because we had a bubble in the biggest asset around for the American public.
ROSE: You have made the point that I guess it was in 1779 or somewhere right about then that the Chinese population was like 290 million.
BUFFETT: Yes, 290 million.
ROSE: The American population was about four million and Europe’s was about 50 million.
ROSE: And look what happened.
BUFFETT: Look what happened. And we weren’t smarter, we didn’t work harder, we didn’t have greater natural resources, we just had a system that worked and they’ve been smart enough to catch on.
ROSE: But -- but there are interesting things that are at work as well, the demographics are at work. So they have more domestic demand possibilities in China because of their population or in India because of their population or in Brazil and places like that.
Some will argue that it’s going to be a much more competitive environment for the United States. While we may have a system, other people are learning from our system and they also have some built-in advantages that we don’t have.
ROSE: Yes, they’ve got -- they’ve gotten smarter about things.
BUFFETT: I mean if you go back 50 years in China, the Chinese were just as smart then. They worked just as hard but they weren’t getting results. And now they’re -- they’re getting incredible results. They -- they picked up on the system but that’s not bad for us. I mean we do not -- the world isn’t a zero-sum game at all. We want the rest of the world to prosper.
We’ll sell them a lot of things. You know, most people don’t realize it but our exports as a percentage of GDP have doubled in the last four 40 years. We have become better at exporting things. But just we -- they import a lot better.