CNBC Transcript: Warren Buffett on China, the Economy, and Corporate Jet Tax Breaks (Part 7)

JOE: Let's get back to Becky and Warren in Omaha. Here's what I was thinking, Warren. Or let's say that we raise revenues, let's say that we do the Buffett tax. I'm getting the feeling, and I don't know, you can answer for me, that you're not necessarily talking about using the increased revenue to expand the size and scope of government to include more social programs or more of a safety net. Would you use most of the increased revenue to pay down the deficit that we're already running? Or are you actually looking at becoming more like Europe in terms of a welfare state and a social safety net?

BUFFETT: Oh, no. We need to reduce the deficit and I probably am for doing it. I don't think the difference between 8 or 9 percent GDP stimulus and 4 percent is that dramatic at this point. Most of the economy is recovering and the other is a matter of time and not stimulus in my view. But no, I—spending's going to have to come down. We are a very, very, very rich family. We have $120,000 of GDP per household in this country. It's fabulous. It's, like I said, it was six times when I was born. But even a rich family can promise too much. I mean, in the end you deal with finite resources and it's easy to promise and you can overpromise and we've overpromised. And that's why I feel terrible, frankly, that for people that will find promises modified and/or broken and I—and I also feel that it's terrible to have a situation like that exist when the rich are paying the lowest tax rates that they've paid in my lifetime. I was paying higher tax rates back in the '50s and '60s when I had very small income. So I—we are not—we're not paying down anything. We may be reducing the size of the deficit. And, incidentally, we can run a 2, 2 1/2 percent of GDP deficit indefinitely and not have GDP go up as a percentage—I mean not have—not have the debt go up as a percentage of GDP. We've done it. We've done it for the last 50 years since World War II. But the numbers we're running now are not sustainable over time. And the only way to change something that's not sustainable is to change it.

JOE: All right, but I mean the 15, 25 you talked about if we go—even if we met at 20, 20 you're talking about...

BUFFETT: We don't have to meet. Yeah, we don't have to meet, Joe.

JOE: Yeah. Right.

BUFFETT: It can be—it can—it can be 18 1/2, 20 1/2, 18 1/2, even 21.

JOE: But it's coming down from 25, Warren. I mean, you're—whatever you're talking...

BUFFETT: Right.

JOE: ...about you are talking about so that's why a lot of people that say, `look, we're just spending too much' and maybe, you know, both sides do have a point, that it is a spending problem first and foremost that's going to have to come down no matter what.

BUFFETT: It's not only a spending problem, it's a promise problem.

JOE: Right.

BECKY: I mean...

JOE: Right.

BECKY: Right.

BUFFETT: Yeah. But it's—but it's—but it's an income problem, too.

JOE: It is, but...

BUFFETT: Yeah.

JOE: ...you know, you've got—but then you come back to...

BUFFETT: It's an important income.

JOE: Yeah.

BUFFETT: It's an important income problem, but there's no question you've got to go up three or three and a half points on the—on the income side and you've got to come down four points or so on the expenditure side and you've got to modify the promises or you'll never get it done on the expenditure side.

BECKY: The Republicans, though, have said that the way they can come about doing this is that, A, we're in a recession that we've been coming out of and eventually as the economy improves that will bring the revenue numbers back up. And B, that if you cut back on some of the taxes that it would actually increase the economy even further. Do you think that that's the case?

BUFFETT: Well, they—it's very interesting. They say if you increase taxes that will hurt the economy, but they say you can cut expenditures without hurting the economy. In other words, they say if you reduce the deficit one way it doesn't hurt, and if you reduce the deficit the other way that you got...

JOE: But—but they're both destimulative. Which—it's probably not a great idea to do both, Warren. In other words, cutting spending and raising taxes are both destimulative. I mean, where would your priority be?

BUFFETT: It depends.

JOE: I mean...

BUFFETT: It depends who you raise them on. It depends who you raise them on.

JOE: Right, right, right.

BUFFETT: I mean, if you—I've got 6 or $7 million in my pocket right now...

BECKY: Really?

BUFFETT: ...just from last—just from last...

JOE: Wow.

BUFFETT: She got more interested.

JOE: Wow.

BUFFETT: Just from last year...

JOE: The baby...

ANDREW: Right.

BUFFETT: ...just from last year in terms of what the Republicans saved me, you know. And I could have paid 34 percent just as easily as 17 percent. The government would have 6 or 7 million more and I had six or seven million less. It wouldn't change one thing I'd be doing.

JOE: Right.

BUFFETT: Our corporations are awash in cash. You know, we have spent...

JOE: Just...

BUFFETT: ...as I said, we spent 10 billion on IBM, we spent 5 billion on B of A, we spent 7 1/2 billion on capital expenditures, a record this year.

JOE: So you do think—do you think corporations are undertaxed in this country, Warren?

BUFFETT: I do not think tax rates are too high on corporations. No, not at all.

JOE: So you would—everybody says bring it down.

BECKY: What about the bigger argument?

JOE: Yeah, everybody says bring down the corporate taxes.

BUFFETT: Yeah, well, listen, I mean, Berkshire would love to have it brought down. I mean, if you bring us down 10 points and we make billions more. But...

ANDREW: Well, what was your tax—your tax rate was 5 percent or something at Berkshire, wasn't it?

BUFFETT: No, no, no, no, no.

JOE: What was it? What was it?

BUFFETT: No. Our—it'll—our accounting tax rate will be probably 32 or 3, something like that.

JOE: What does that mean, accounting tax?

BUFFETT: We don't—well, I mean, I mean, if you look at—if you go back to the back of our annual report and it shows the tax rate calculated. But that allows—that allows for deferred taxes. But our tax rate is...

ANDREW: So the—the effect...

BUFFETT: Our tax rate is probably—it's—if you take the S&P 500, our tax rate would probably be about 7 points higher.

ANDREW: So Warren, just to...

BECKY: Then the average across the S&P 500?

BUFFETT: Yeah.

ANDREW: Just to clarify...

BUFFETT: Right.

ANDREW: ...the effective rate you're saying is about 33?

BUFFETT: Something like that. If you got our annual report there, you can look it up in the back.

ANDREW: OK. We'll take a look. By the way, just to switch gears because we've got a number of viewers who've asked the question, you talk about what you loaded up on and bought, including IBM, is there anything you've sold in the last quarter?

BUFFETT: Not much. We've—yeah. We may have trimmed a little here and there, but we've had no massive selling of any kind. I like buying better.

BECKY: You know, you go back to the corporate tax rate, though, and for the people who are saying you ought to lower that corporate tax rate, even Simpson-Bowles talked about doing that, but getting rid of a lot of the deductions.

BUFFETT: You...

BECKY: It's the same situation. If you can make sure that people are actually paying that rate, is that an effective way of doing it?

BUFFETT: Well, I—obviously...

BECKY: Reducing it, so let's say, 25 percent.

BUFFETT: Yeah. We can come up with a much fairer corporate tax arrangement than we have now. I mean, there's no question about that. But generally speaking, the proposals are you can take the rate down and make it revenue neutral by knocking out all those special things. I have nothing against that. That would—that would benefit Berkshire, frankly, but I will tell you, if it's going to be revenue neutral, it means just as many people are going to have their taxes increased as decreased and the ones that are going to have them increased are going to be flooding the Capitol with lobbyists. I—if it's going to be revenue neutral, I will—you know, that means billions and billions and billions more are going to come from some companies because we're going to pay less at Berkshire.

BECKY: Right.

BUFFETT: That's—that will be hard to pass. And that's why you don't really see much happen on that front.

BECKY: But again, the...

BUFFETT: It would be a desirable—it would be a desirable outcome, but I've got a—I've got a dog in that fight. I mean, that—anything that brings down the rate and gets rid of most of the loopholes, we benefit from.

BECKY: But that argument is the one that's being put forth. Do you think it's possible to get not only a corporate tax rate, but a personal tax rate that gets rid of a lot of those deductions and manages to still bring in revenue? Is that possible in the Washington of today?

BUFFETT: I think it's very tough. I think the people who find—if something's revenue neutral, I think the people who find their taxes going up are going to complain and spend a whole lot more money fighting it than the people on the other side. It may not be impossible, but I'm just saying that that's the reality of sort of the functioning of Washington.

BECKY: But we have simplified the tax code in the past.

BUFFETT: We have.

BECKY: The last time was back in the '80s.

BUFFETT: Right.

BECKY: Is it possible to do that again?

BUFFETT: It's possible.

BECKY: But you don't sound hopeful.

BUFFETT: Well, I'm not real hopeful, no.

BECKY: Hm.

BUFFETT: But for one thing, it needs to raise more revenue, which makes it even more difficult.

BECKY: Right.

BUFFETT: All right. Joe, I think we need to slip in another quick break here, but when we come back we do have more to discuss with Warren.

JOE: Excellent. OK. Great. Coming up, we have more from Warren Buffett. Don't miss Squawk Box tomorrow. Becky's back week continues with Mario Gabelli and BlackRock's Larry Fink.

SEC INTERVIEWS BUFFETT ON SOKOL CASE

ANDREW: Let's get back to Becky and Warren Buffett now in Omaha. But before you guys kick it off, I have a quick question for Warren, which is this: A couple of weeks ago Rajat Gupta the Goldman's—former Goldman Sachs board member was charged criminally with tipping off Raj Rajaratnam on what was your investment in Goldman Sachs. And I was curious A, if you knew anything about it either directly or indirectly; and B, your sort of larger view on the fact that a board member at a firm like Goldman Sachs, which you do believe in, potentially might've been tipping off and giving information to others.

BUFFETT: Well, I think that unfortunately people do that and when they do, I hope they get caught and when they get caught, I hope they get prosecuted. It—you know, the system has a lot of temptations in it and people succumb to temptations and the only way that you reduce that kind of activity is you look very hard to find it and then you do something about it when you do find it.

BECKY: Mm-hmm.

ANDREW: I was also curious, real quick, if I could, an update on the David Sokol situation. Has there been any movement, have you heard back? I know at the time, last time we talked about this back in May, you had not heard from the government. Has the government moved on this or talked to you about it all?

BUFFETT: The only time, in June, the SEC, it wasn't—it wasn't formal or informal and it was not a deposition, no court reporter, anything like that. But they asked me to—well, they asked me a lot of questions and—which I gave them the answer to and so I know nothing about what's—what they're doing beyond the fact that they wanted to ascertain certain facts from Berkshire and from me as to what had taken place.

ANDREW: You...

BUFFETT: And we cooperated—we cooperated 100 percent. Like I say, it was—it was not a—it was not a—there was no court reporter, nothing like that.

JOE: Just seeing NetJets...

BECKY: No...

JOE: Seeing NetJets—sorry, Beck, seeing NetJets again, just reminds me of the—you—are you on the record saying that you think it's a bad idea to—for—to get rid of any type of tax breaks for corporate jets, Warren? I mean, you do have a horse in that game, too.

BUFFETT: Yeah. Well, I can say this, we have a—I have a couple of personal NetJets contracts. I get no tax breaks whatsoever. I don't get depreciation, I don't get deduction of the expenses, I don't get anything.

JOE: Yeah.

BUFFETT: And if I have a loss when I sell my interest in the plane, I don't get a—I don't get to deduct the loss or anything of the sort. It's just a personal expenditure. You know, there's 100 percent bonus depreciation that exists this year on really all sorts of assets. I mean, what we're—what we're spending money for on our utility, what we're spending money for on our railroad. And that—I assume that applies to—well, I know it applies to corporate aircraft or any kind of—any kind of aircraft used for business purposes. But I don't—I don't think—I really—in terms of Berkshire, we have a whatever depreciation schedule was allowed and we bought ours when there was normal depreciation, our interest in NetJet and like I say I get no deductions whatsoever on my own personal.

JOE: Yeah. Yeah.

BECKY: Now Warren, you've talked about—oh.

JOE: No, go ahead.

BECKY: You talked about how you—you OK, Joe?

JOE: Yeah, I'm OK. OK. The last time he flew a commercial, still, he never did answer that. He never referenced...

BUFFETT: The last time I flew commercial?

BECKY: Flew a commercial jet.

BUFFETT: It was a long, long time ago. It won't happen again.

JOE: What was the—what was the in-flight—that's what I said, the in-flight movie? The in-flight movie was Charlie Chaplin. It had just come out. It was still in theaters.

BUFFETT: Joe, I tell you, if—once you—once you've flown NetJets, going back to commercial is like going back to holding hands.

JOE: Don't rub—don't rub it in.

BECKY: Yeah, I know. I tweeted about my experience getting here yesterday. I won't repeat it on air. But Warren, you've talked an awful lot about how you're optimistic about this country and where it's headed and you've been putting your money where your mouth is by buying American stocks, but what we've seen with the beginnings of earnings season or with the last earnings season are some pretty concerning notes. When you look at what GM came out with, it talked about the European slowdown and how that's going to be affecting them. Macy's came out and gave guidance that was a little lower than the Street had been expecting for the fourth quarter. And those are things that rippled through the stock market. I know there's a lot of concern out there about the slowdown and what it could mean. What...

BUFFETT: I don't have the faintest idea what the stock market's going to do and I would say this, in the last 75 years, Macy's has probably been disappointed with their sales at least 25 or 50 times and General Motors has seen a slowdown 20 times. It really doesn't make sense in my view to pay attention to that. I mean, the luckiest person in the world, in the history of the world, is the baby that's being born in the United States today.

BECKY: Hm.

BUFFETT: So your Kyle is a very, very—you know, that doesn't mean some of them won't be born with bad health or anything, but overall, there's never been a better time to be born than today and there's never been a better place to be born than the United States. And we will have all kinds of problems. We've always had them. Macy's has always had, you know, bad quarters. General Motors...

BECKY: It wasn't even a bad quarter, though. I was just saying that the numbers could be a little below what the Street was expecting.

BUFFETT: Yeah.

BECKY: So I guess the question is, are the expectations getting ahead of where we really are?

BUFFETT: Well, I—my—I don't think mine are. I mean, what I see is I see an economy where most of the economy has been recovering quite steadily, although the public opinion hasn't been as steady, but quite steadily for a couple of years now. We should thank Bernanke and Paulson and President Bush and President Obama and Tim Geithner for doing a lot of things that helped us get out of what could've been a terrible, terrible mess. It was a mess.

BECKY: Hm.

BUFFETT: But we really were right at the abyss and we had—we had a government that did the right things. Maybe they did some wrong things earlier, maybe they didn't do it perfectly.

BECKY: Mm-hmm.

BUFFETT: But I give them great credit and this country's best days lie ahead, believe me.

BECKY: I know that this is not something you pay attention to on a daily basis or even a weekly or a monthly basis, but the market volatility has increased and you talked a little earlier about how there's always uncertainty out there. But that uncertainty seems to be something that is resonating with the public and with investors right now. Do you see an end to that uncertainty or is this a slightly different period where we're very worried about the headline risk coming out of Europe?

BUFFETT: I wouldn't worry about the headline risk unless I was on leverage.

BECKY: Yeah.

BUFFETT: I mean, if I own a good business privately, am I worried about what the headlines are tomorrow if I've got the best—if I've got the best restaurant in town? If I've got the best dry-cleaning establishment in town? The best auto repair shop in town? I'm not worried about the headlines tomorrow, I'm worried about taking care of my customer.

BECKY: Hm.

BUFFETT: And it's the same with big companies. So I don't know what the stock market's going to do and nobody else does, either. I mean, but forget about it. I don't know what farm prices are going to do tomorrow, either, but I know a good farm run by an honest tenant farmer and that there'll be improvements in agriculture, so just own good assets run by decent and honest people and if you can own all of them, you can own all of your own business is wonderful, you own a little piece of it, it's wonderful, but don't pay any—volatility is good for you.

BECKY: Hm.

BUFFETT: I mean, if farm prices would vary from X to 3X in a given year, I'd make a lot of money in farming. I just buy when people were depressed. They don't move that much. Stocks overreact all the time and that's why a guy can keep his senses about him can get very rich.

BECKY: You've been doing this for a long time. You're 81 years old now and Whitney...

BUFFETT: You've noticed.

BECKY: Yeah, I did notice. Whitney Tilson came out with a report, I don't know, maybe it was a month or two ago, and said that he thinks there's an 80 percent chance that you'll still be the chairman and CEO of Berkshire in five years and a 50 percent chance that you'll still be doing this 10 years from now.

BUFFETT: I think he's right about the 80 percent chance. I'll have to go look at the figures, but I'm in, you know, I'm in very good health, I love what I do and I'll go gaga someday and they'll yank me out of here.

BECKY: But you feel good and you think that that's a reasonable 80 percent chance that you'll be doing this five years from now?

BUFFETT: Yeah, if I'm lucky, sure.

BECKY: Joe Paterno is somebody else who's been doing his job a very long time.

BUFFETT: Don't bring him up.

BECKY: Well, there was some newspaper reports, I think the AP wrote a story about how, you know, you're one of the few people who's been doing things almost as long as he did. He had a longer tenure than you did and Nebraska beat Penn State over this weekend.

BUFFETT: That's right.

BECKY: Did you watch the game?

BUFFETT: Sure. I enjoyed the game.

BECKY: But it does say something about long tenure.

BUFFETT: Age gets to you at some point.

BECKY: Yeah.

BUFFETT: It gets to different people at different points. I mean, we've had managers that we've had to terminate, you know, in their low 70s.

BECKY: Mm-hmm.

BUFFETT: And others were better in their 70s than they were in their 40s or 50s. It varies enormously and—but obviously, age takes its toll.

BECKY: Right.

BUFFETT: And the question is when it—when it becomes noticeable and as I've told people, I said, you know, my three kids are supposed to come in as a group and say, you know, you’re going gaga, dad. I tell them if only one comes in, they're out of the will, so they have to come in as a group.

BECKY: You brought in new managers to manage some money and that has raised some questions about things, too. You brought in Ted Seides and Todd who was there before, but we haven't talked to you since you brought in Ted.

BUFFETT: Ted Weschler, yeah. Right.

BECKY: Ted—sorry, Ted Weschler.

BUFFETT: Yeah, yeah.

BECKY: And that has people wondering are you looking at people to be running these management or is this just part of building up your bench?

BUFFETT: Well, three or four years ago we said that we were going to build up a management team that would—in investments, that would succeed me and hopefully even be helpful to the CEO in acquisitions and on that sort of thing. And it wasn't any hurry to do it. On the other hand, we had to get about it.

BECKY: Mm-hmm.

BUFFETT: And fortunately, I—we found two guys that are—that are home runs. And I feel terrific about that. That job is done. That doesn't mean we won't add a third, but that job is done. And they will handle—in fact, you'll see some of their purchase—you'll see some of Todd's purchases in the third quarter. Any time there's a $200 million purchase or something like that, that's very likely to be Todd or Ted, that's not me because I look at bigger things. But those fellows have the capability of running the whole portfolio.

BECKY: Mm-hmm.

BUFFETT: And they're getting a piece of it to run now.

BECKY: I feel bad for Rick Perry. Ted Weschler. I'm coming up with things. Guys, we only have a couple of minutes left, so if you have any one-offs that you want to get back to Warren.

ANDREW: Great. Warren, I had a question and Becky touched on it earlier, this idea of the volatility in the market. We have Larry Fink coming on the broadcast tomorrow, he owns iShares and is a big supporter of the ETF business.

BECKY: Mm-hmm.

ANDREW: Do you think that ETFs are ultimately creating some of this volatility? Are they good or bad for the market?

BUFFETT: Well, I don't know about them specifically, but I would think anything that causes people to think they can trade actively in stocks and do better than if they sat on their rear is a terrible mistake. American business has done wonderful, wonderfully for investors over the years, yet many investors have managed to turn in bad performances. You can say to yourself if the Dow started the 20th century at 66 and is now at 12,000, how could anybody lose money? But people do lose money. But they lose money by trying to jump in and out of this and that and think that, you know, they should buy this stock because the earnings are going to surprise on the upside or some crazy thing like that. If they just buy good businesses, they'll do fine. Just like if they bought good farms 30 years ago they do fine or good apartment houses 30 years ago, they do fine. So volatility is your friend, not your enemy. It—as long as it creates cheap prices from time to time and it does.

ANDREW: All right.

BUFFETT: So it—the investing game is simpler than it looks, you know, and if people would read "The Intelligent Investor" in chapter 8, they'd do fine.

ANDREW: Right. One of the other issues that may be creating volatility, people talk about it, is credit default swaps and what role they've played, for example, in Europe with some of the bonds there. And I'm curious, do you believe that credit default swaps should exist? They should be outlawed? What should happen to them?

BUFFETT: Well, they can be a very destructive instrument. I mean, if you think about it, you can't go out and insure my house against fire because you do not have an insurable interest, as they call it in the trade. Because once you insure my house against fire and you may decide that, you know, that maybe dropping a few matches around my lawn might be a good idea. And credit default swaps, if you don't own underlying debt and you buy a credit default swap, you have an interest in that place getting into trouble.

BECKY: Yeah.

BUFFETT: And when a lot of people have an interest in a place getting in trouble, they may start putting out misleading statements about it. I mean, if you had a bank—if you were short the stock of a bank, you might hire—and there wasn't any FDIC, you might go out and hire 100 movie extras to stand in front of that bank.

BECKY: Mm-hmm.

BUFFETT: And in effect, you would create your own reality. Now buying credit default swaps and talking about them and causing the price of credit default swaps to go up creates its own reality to some degree. So I think that they are potentially a very anti-social instrument.

BECKY: Hm. You know we are down to just the last minute or two of time and I know that you have the SEC filings for Berkshire that will come out tonight. You've already told us that IBM is the big purchase that will be revealed in those. Are there other big surprises we might see in those filings?

JOE: One last chance, Warren, come on. Give us something, one.

BUFFETT: There won't be surprises. I've mentioned that we increased our Wells some and you'll probably see a few purchases that Todd—Ted has not gone to work for us yet, but he will be coming in January.

BECKY: OK.

BUFFETT: You'll see a few purchases that Todd has made. And incidentally, he doesn't—he doesn't check with me before making those purchases. He has a block of money and he can do—he can be doing things while we sit here and it's entirely his book.

BECKY: All right. Will you find out what they are when you get back to the office?

BUFFETT: No, no, I—sometimes I find out...

BECKY: Or do you find out when the SEC filings come in?

BUFFETT: I might find out a month later. That's the way it was with Lou Simpson, too, when he worked for us.

BECKY: OK.

ANDREW: OK.

BECKY: Well, Warren, we want to thank you very much for being with us for this program. It's been great talking to you.

BUFFETT: Thanks for having me.

JOE: Thank you, Warren.

ANDREW: Thank you.

JOE: Thanks for the brick.

BUFFETT: Thanks.

JOE: Thanks for the brick, too.

ANDREW: A big special thanks to Mr. Buffett.

BUFFETT: Yeah. I'll send you another one. Just give me the size.

JOE: Yeah.

ANDREW: Becky, safe travels back. We'll see you tomorrow.

BECKY: Thanks, guys.

ANDREW: Make sure you join us tomorrow, SQUAWK ON THE STREET is coming up right now.

JOE: See you, Becky.

BECKY: Bye, guys.

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