2006: Thoughts on Corporate Taxes

AUDIENCE MEMBER: I am John Bailey (PH) from Boston, Massachusetts.

I wanted to ask, Warren and Charlie, if you could consider three hypothetical securities for a long-term investment.

The first would be, like, a share in median family income for the United States. The background there that, in real terms, median family income has been stagnant for approximately 30 years.

The second security would be a share in all corporate income in the United States. The background there that corporate income has been taking an ever larger slice of GDP for several years.

And, finally, a bit more abstract, a share in all capital assets in the United States, and I would like to include all intangible capital assets, if possible.

So would any of these be of interest for a long-term holding, perhaps 20 years or so? And, if not, why not?

WARREN BUFFETT: Well, I think I’d rather buy ISCAR. (Laughter)

The corporate profits, as you point out, have been close to their highs, except for a very few years post- World War II, as a percentage of GDP. It’s hard to imagine being much larger.

It’s interesting. While corporate profits is reported — you take S&Ps, percentage of book, percentage of sales, put on the line, they’re all on the high end.

Corporate income taxes, really, are not that high relative to the total revenues of the country. So you can see that there’s been a little disconnect there in some manner.

But median family income is something that Charlie and I have never even considered. We’re not shooting for that.

It is certainly true that, in the last five to ten years, that the disparity in income has widened significantly and that the tax breaks for the wealthy have been extraordinary.

I’ve pointed out in the past that most of the members of the Forbes 400, myself included, pay a lower percentage of their income to the U.S. government, counting Social Security taxes, than does the receptionist that works in their office.

That was not true 30 years ago, and I don’t think it’s something that should be true in a rich society, but it has happened.

And I just computed my 2005 return. In 2004 — and I have no tax shelters. I don’t have a tax adviser. I just do things, and at the end of the year I add it all up.

In 2004, my rate was the lowest of the 15 or 16 people in the office, and in 2005, my rate was even lower.

And that’s courtesy of the U.S. government. It’s not courtesy of a lot of tax write-offs or anything of the sort.

And I think that’s — I think it’s crazy, and I don’t think the American people understand it very well. And I think that if they did understand it, they should, and would, be quite unhappy about it.

So I think that — I think that the lower incomes, median — and the medium — people making medium amounts of income, have not shared in the prosperity of the last decade or so in a way that’s all proportional to the way the wealthy participate in it.

The last point you mentioned was too esoteric for me, so I’ll pass it over to Charlie.

CHARLIE MUNGER: Yeah. The main figure that matters to all of us, including the people at the median, is how does GDP per capita grow? And those figures have been very good.

And so, I wouldn’t get too wild on the subject of median income. It isn’t like we’re all permanently in some status from nobody moving from status A to status B.

There’s a huge flux, both up and down. And what’s really important is that the pie keep growing at a decent clip.

All that said, I think that Warren is right, that some of those tax changes were a little crazy. I mean, they caused more envy than we needed. But I don’t think it’s all that important.

WARREN BUFFETT: Yeah. We might think it was more important if we were working at the median income, Charlie. (Laughter)