Warren Buffett appeared live on CNBC's Squawk Box this morning, February 27, 2012, for his annual "Ask Warren" three-hour marathon.
This is part three of a transcript of his comments. (Click here for part two)
JOE: Let's get to Becky who is in Omaha this morning. She's with Berkshire Hathaway chairman and CEO Warren Buffett.
Becky, I was — I don't know — leading into the last break, I was thinking about, I don't know whether you saw Barron's, there was a Jeremy Grantham piece that was very troubling to me and I wanted to just at some point ask Warren about...
BECKY: Why don't you ask him now?
JOE: Yeah. OK. Warren, his basic thrust was that our middle class has been getting more and more decimated over the years as a lot of the cheap labor is found in the rest of the world where obviously the standard of living is not as high and it's just been a natural progression to send a lot of the jobs overseas. As a result, the middle class has had to borrow to fund a lifestyle and that's one of the reasons that the consumer is so strapped at this point. And it's a very negative piece where basically looking for another seven years or so of sub-par growth because of this and I don't know what the answer is. I think he — re-education or more to try to become up to, you know, more competitive or at least better than the rest of the world at doing things for our labor force. Do you have an answer for that?
BUFFETT: Yeah, the answer is, you know, our market system has worked well for 200-plus years. It's working well now in all areas except home construction, those related to home construction. You know, we're sitting here where the market has doubled from three years ago when we were sitting here. This country is remarkable. I mean, you have — you have people at our own company, you've got Tony Nicely at GEICO trying to figure out how to — how to serve customers better tomorrow, how to bring down costs. You've got Matt Rose trying to plan for the future of railroads in Fort Worth today and tomorrow. You've got people at Apple trying to come up with new products that you and I haven't thought of yet. America — American capitalism is dynamic, so anytime you look at it on a static basis, you can get very pessimistic.
And while I got out of school in 1951, the two people I revered most in the world, my dad and Ben Graham, told me it was a bad time to start in business, you know. It — you can sit down at the start of every year and write down 10 or 20 reasons why it's, you know, things are terrible. But the truth is, this economy works wonderfully. It's working wonderfully now. I mean, it isn't working for everybody at this moment and it's coming back from a terrible shock that it received in the fall of 2008. But look how far it's come back and it continues to come back every day. It's been doing it now since the fall of 2009. So it's, you know, it is — it is a terrible mistake to get pessimistic on America. You know, it has not worked since 1776 and it's not going to start working now.
BECKY: Warren, we touched on this in the last hour, but just the idea, you bring up that the stock market has doubled over the last three years when we've been sitting here and again, there are many people who now worry that the best and easiest gains are over. You said yourself in the last hour that it's not springtime anymore.
BECKY: Does that change what people — the way that people should be looking at the stock market as a potential investment?
BUFFETT: They should be looking at the funds they're going to save. I mean, that's the — those are the only funds you save that you invest with, and figure out what's the best thing to do with them. And they can buy farmland, they can buy apartment houses, they can buy duplexes, they can buy businesses, they can buy businesses through stocks, they can buy rare stamps, they can buy gold or they can stick it in money market accounts and all. They've always got all those options. And I've written a section in the annual report why I think that businesses are the best option. Now the nice thing about businesses is in this country is you can buy into all the best businesses in the United States, virtually. You can buy a piece of them and you don't have to buy, you know, if you don't understand company XYZ, you can buy company ABC. And naturally, it would be like — nicer to buy them at the prices of three years ago.
BUFFETT: But you know, they are attractive relative to other assets. That doesn't mean they're going to go up, but I will guarantee you that over a 20 or 30 year period, they're going to perform very well. And as I mentioned a little earlier, actually single family houses bought on a distressed basis now and financed over a long term at these interest rates may be the best investment of all. I mean, if I knew anything about real estate and I just was working with a relatively small amount of money and I was seeing distressed houses around me that I could rent out, I would buy them and put on an 80 — a 4 percent mortgage for 30 years and you know, I — three or four or five years, I'd probably sell it at a very substantial profit relative to my equity.
BECKY: Mm-hmm. OK. You know, Warren, we left off in the last break talking about taxes and your role in this tax debate has become very central and very polarizing. And just the last week Governor Chris Christie of New Jersey weighed in on this and weighed in on what you've been saying. Take a listen to what he had to say.
PIERS MORGAN, CNN (On tape): Warren Buffett keeps screaming to be taxed more.
Governor CHRIS CHRISTIE (R-New Jersey): Yeah. Well, he should just write a check and shut up. Really, and just contribute, OK? I mean, you know, the fact of the matter is that I'm tired of hearing about it. If he wants to give the government more money, he's got the ability to write a check. Go ahead and write it.
BECKY: He's not the only person who feels that way.
BECKY: We've got a lot of viewer email that came in. We've been sitting down and doing this ask Warren session here for I guess the last four years or so.
BUFFETT: Mm-hmm. Yeah.
BECKY: And this year more than any year there were a lot of emails that came in that similarly echoed what Chris Christie had to say. What...
BUFFETT: Well, I hope they were a little more eloquent than that. But you know, it's sort of a touching response to a $1.2 trillion deficit, isn't it, that somehow the American people will just all send in checks and take care of it. That was first come up with — first fellow to come up with that was Senator McConnell and I really — I — it's sort of astounding to me that somebody that has the responsibility for being the minority leader in the Senate would think that you attack a $1.2 trillion or so deficit by asking for voluntary contributions. Since he did, I offered to triple his, but that's a — that's a side show. The real problem we have is we're taking in too little money and we're spending too much and that's not going to be solved by voluntary contributions. What we need is a policy, a tax policy. And to give you an idea of how extreme it is, just take a look, take a look at what I've labeled A1. And you can — you can find this on the Internet. And the figures I've circled, the 1992 showed that the 400 largest incomes in the United States that year, adjusted gross incomes, were 18 billion. Now that's about $45 million a person. And if you go down to 2008, it's 108 million. That's 270 million a person. So from 1992, the 400 top incomes went from 45 million to 270 million, which is not bad, I think. Now if you go over to A2...
BUFFETT: ...you will see that during the same period, those top 400 saw their tax rates drop from 26.3 percent to 18.1 percent.
BUFFETT: At the same time that was happening. But what's even more startling is if you go to A3 and you will see that in 1992, six people among those 400 paid at a rate that was less than 10 percent. That's just two-thirds of what the average person pays on payroll taxes. And that six went up to 30 over that period. And the number paying from 10 to 15 went from 10 to 101. So 131 of the 400 largest incomes averaging $270 million each, 131 out of 400 were paying at a 15 percent rate or below. And that — the payroll tax for people making less than 100,000 up until this year was 15.3 percent, they were paying. So solving that problem — solving the problem of me paying the low tax rate I pay is not going to solve the fiscal problems of the United States, but to ask other people to be making sacrifices during this period and we're going to ask them to make sacrifices, we're going to ask them to make it on the revenue side and on the expenditure side, and to leave this group alone is a travesty.
BECKY: So to Joe's point, you can't fix the deficit by just going after...
BUFFETT: No. You can't — you can't fix the deficit by going after any one expenditure or any one revenue item. And you certainly can't fix it by asking for voluntary contributions.
BECKY: So this is something that you think for the optics of the situation or just for the appearance of fairness, the president says all the time.
BUFFETT: I think it should be incorporated into a revision of — which is going to have to happen on both the revenue side and the expenditure side. But I certainly think it's important to incorporate this into a revision. And I think this is something that can be done immediately.
BUFFETT: I mean, a minimum tax on people — there's 131 people that filed those returns that showed 15 percent of less and my cleaning lady, Mary, you know, has a payroll tax of 15 percent.
JOE: But — yeah, but what — I just don't know why — I don't know why you harp on it so much, though, Warren, when you know that it's 1 percent — it's not going to do any — it's not going to solve anything. Maybe we need to fix it for the optics of the situation, but what — I guess, the real — the real question is what do we do with dividend income and capital gains income?
JOE: Because it — let's say that you work your entire life paying ordinary income and you're not a — let's say you're not getting carried interest. Let's say you pay — under your normal situation, you're paying ordinary income at 30 or 35 percent. And you — and you do very well and you're very successful. And at that point in your life, you're 60 years old, 65 years old, you invest in dividend-paying stocks and you have capital gains, which lowers your taxes to that rate. You've paid taxes once already. I mean, there — we need to decide what the correct rate for capital formation is for long-term gains and for dividend income. It just seems — I don't know, just to keep bringing it up as a — as a red — look at this, look at this, it's not fair, it's not fair. When you know it has to do with long-term gains and dividend income. Let's do something, let's find the right rates for dividend income and long-term gains and stop pointing fingers at these people.
BUFFETT: One point — I don't think I've named an individual.
JOE: No, you haven't. But it's a matter of public record, you've only got to look up 130 of them.
BUFFETT: Well, no, but the real question is this a tax code the United States should be proud of that produces these results?
JOE: I don't know whether we should be...
JOE: But now that we're back to emotion again, we're proud, we're not fair, we're not this. We've got a huge problem and this doesn't — this won't scratch the surface of the problem. And carried interest?
BUFFETT: Oh, well, I was...
JOE: Carried interest, you need to do — you need to do something with carried interest as well.
BUFFETT: I would say...
JOE: And maybe if there's an optical — if there's that optics there. But the real problem and the reason Simpson-Bowles is so hard is that most people don't want their entitlements to be touched, for Medicare or for Social Security and that's going to be the hardest thing that we — that we try to do in dealing with the deficit, not taxing 131 people that makes you feel better about yourself.
BUFFETT: Well, no, the numbers here, though, just think about it a second, Joe. The numbers here probably come to 40 billion. Now that doesn't — that may not sound like a lot of money to you, but 40 billion is 2,000 — is almost $2,000 a piece for 20 million families.
JOE: You — I know.
BUFFETT: If you take — if you take the bottom 20 percent in the United States, there's 20 — almost 24 million households, households, and their top income is $21,000, now if you — to those people, 40 billion divided by their 20-some million is real money, it's 1,000 or $2,000. But I don't — I don't argue with you. It's going to be tough to take away promises we've made. We — we're a rich family that's overpromised. But to not start at the top. I mean, this is something we can do something about right now and it is not an...
JOE: But how do we do it, Warren?
BUFFETT: It's not an...
JOE: Shouldn't we try to try to figure out what the...
JOE: ...what the best rate for the most competitive and the rate that brings everyone the most benefit in dividends and capital? We've got to have that discussion. Isn't that more important?
JOE: Because that's how these — that's how these people are — to just like put a, what do you, like a surtax or something, that — or we can do that. I've asked you why can't we just tax you at 10 percent of your wealth and that didn't go over very well. If you had a 10 percent of all this wealth would bring in quite a bit of money, too. We'd get — I figure we get about 5 billion from you alone, right?
BUFFETT: Yeah, that's true and actually, you know, it's been — wealth tax is tough to enforce. I mean, very hard to say what, you know, what every farm is worth or you know, every business, private business is worth. I don't — I don't particularly favor a wealth tax, but I would not — I would have no objection to it. I mean, if 10 percent of my wealth and 10 percent of everybody's wealth went to the government, I don't think that's the best system, but...
JOE: What should we do with capital gains? What do you think — you think is 30 percent OK? What about dividends? They're actually taxed the first time when a company is in its operation — I guess you say it's taxed to 1.2 percent anyway for corporations, but they do pay taxes once. What should the dividend rate be? I mean, you must have an idea where capital gains and dividends should be right now. Tax rates.
BUFFETT: Well, OK. Incidentally, that point about double taxation has been made, but I just thought it would be fun to take a look at my own situation because it — if you go back to — I did — I made these calculations in the office three times where my rate was about half or everybody's rate. If you go back to 2004, if you put up what would be that number on that, if you put up — well...
BECKY: Warren, let me ask you.
BECKY: What do you think about dividends? Is there a rate that is acceptable? If they went to 25 percent, if they went to 30 percent?
BUFFETT: Well, the best period we had in our — in post-war history, in the '50s and '60s.
BUFFETT: And in the '50s and '60s the tax rate generally on capital gains was 25 percent.
BUFFETT: And the tax rate on ordinary income got up to 80 percent or thereabouts. And our country prospered very substantially. I mean, the stock market did well, investors did well, the economy did well. So that was — that was a rate that worked very well. Corporate tax rates then were 52 percent.
BUFFETT: And people paid them, incidentally.
BECKY: Should capital gains and dividends be the same rate as ordinary income?
BUFFETT: That depends on what the ordinary income rates are. I mean, you'll — you can go that either way. I — that's what they were in 1986. I mean, that was — under Reagan we went to 28 percent on everything. I don't have any problem with that. I think that they're — I think that says every tax system is going to get criticized. I would not have a problem with a 28 percent rate. There would be a lower rate on people with lower incomes, but so it would still be a graduated rate.
BUFFETT: The but idea of taxing capital gains and dividends as — at the same rate, we've done that in 1986 and people thought it was a wonderful improvement on the tax code at that time.
BECKY: Mm-hmm. Joe, does that answer your question?
JOE: Yeah, I think now we're at least — now we're having the discussion, maybe that's what we need to do. And then we need to just, you know, hear from certain people that just say, you know, for competitive reasons, you don't want to raise taxes on the job creators, blah, blah. You've heard all this stuff before, but at least we can then have a...
JOE: We can have an actual discussion. Because that would take care of this whole issue that your secretary pays less than you in taxes. That wouldn't happen if it — if you were — if your income was taxed at ordinary income rates. That wouldn't happen if it — if you were — if your income was taxed at ordinary income rates. We'd be — we'd be finished with the discussion if it was 28 percent, Warren.
BUFFETT: Yeah, no, she wasn't paying — well, you've got to integrate payroll taxes in there, too.
JOE: Well, I know, I know.
BUFFETT: But, yeah. But if you...
JOE: And you must — you must be — I mean...
BUFFETT: ...there's no question — but it's...
JOE: ...it would be nice if you could give her a little bit of a raise then we wouldn't have to worry about it all the time. You could probably pay her a half a million a year, right? She does — I mean, she...
BUFFETT: Well, but...
JOE: ...dealing with you must be worth at least a half a million.
BUFFETT: Her tax rate — well, it is, there's no question, she's worth it. But her tax rate then would not — it would still be double mine. It doesn't — that...
JOE: Well that's because — that's because yours is all on — that's because yours is all dividend again. You don't pay yourself any ordinary income. I wouldn't pay myself anything if I were you, either, but I sure would like $60 billion.
BUFFETT: Yeah, well, 131 out of those 400 people came in at below 15 percent.
JOE: I know. But have they got dividend — OK, now we're — now we're going in circles. We're back to — we got to do — we got to figure out how to do that. And then the carried interest thing, which is also — you know, when you say someone has worked a lifetime and then is enjoying the fruits of their lower tax rates, if you made your entire income from the carried interest then you got — you know, then you got to explain that away. That makes it tough. That optically is bad.
BUFFETT: Joe, no we — we had — we had this fellow, Todd Combs, he came to work for us last year. He was running a hedge fund before that. He made a lot of money from us last year because his performance was terrific. He did exactly what he was doing at the hedge fund before. He has people working for him. He came to work at the same time, read the same papers, and he got taxed at more than twice the rate that he would have if he'd done exactly the same activities at a hedge fund. Now that does not strike me a making any sense.
JOE: Wow, we are — this is — I'm getting — you know, I'm getting...
ANDREW: A lot of emails.
JOE: ...a lot of emails coming in to me personally from — I've heard of some of these people. Anyway, thanks, Warren. We'll be back to talk more with the Oracle of Omaha, the chairman of Berkshire Hathaway, but right now data that could move the markets this week. We'll tell you what you need to be watching. SQUAWK BOX will be right back.
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