2015: How can the US simplify its tax code?
AUDIENCE MEMBER: Mr. Chairman, Mr. Vice Chairman, my name is Andy Peake, and I’m from New York City.
First, congratulations to you on a remarkable 50 years, and second, thank you for hosting a one-of-a-kind annual meeting where you patiently answer questions from shareholders. I believe you are both — (Applause)
WARREN BUFFETT: Thank you.
AUDIENCE MEMBER: I believe you are two of the most knowledgeable and authoritative people on planet Earth on the U.S. tax code.
Our tax code is obviously broken at both the individual and the corporate levels.
Today, we have 2.1 trillion in offshore corporate cash sitting there not being brought home. We have the highest corporate tax rates in the world, and for high-income earners in the U.S., other than hedge fund managers, in states like New York and California, an all-in rate greater than 50 percent.
What can be done to effect real change to bring about a simpler, more rational tax code? Thank you.
WARREN BUFFETT: Well, it takes 218 members of the House of Representatives and 51 U.S. senators, and a president that will sign the bill.
The question is: how much you think the country should spend and then from whom do you get it?
And I would point out that despite the tax rates that all the corporate chieftains complain about, the share of earnings — share of GDP — accounted for by corporate profits is at a record.
Corporate taxes 40 years ago were 4 percent of GDP. They’re now running about 2 percent. They’ve decreased significantly while payroll taxes have increased.
You know, it’s a real question.
And once you get special provisions in the code, it is really hard to get rid of them, absent a major revision of the code.
I actually think — I may be an optimist on this, but I’m — I think both Ron Wyden and Orrin Hatch, the two ranking members, Senate Finance Committee, I think they’re capable of working out something that they — neither one of them likes — but they both like it better than what exists now, and I think it can be made considerably more rational.
But in the end, if we’re going to spend 21 or 2 percent of GDP, we should probably raise 19 percent of GDP.
We can take a gap of a couple percent without getting further into debt as a proportion of GDP than we are, so we’ve got that leeway.
But, you know, you take 19 percent of 17 1/2 trillion, or thereabouts, and you’re talking, as Senator [Everett] Dirksen said one time, real money.
And how much you get from corporations, how much you get from individuals, how much you get from estate taxes, you know, it’s a fight up and down the line.
So I — and in terms of the cash abroad, basically you can bring it back, you just have to pay tax at U.S. corporate rates. And our corporate rates are 35 percent.
Charlie and I, a good bit of our life, operated with corporate rates of 52 percent, later at 48 percent, and the country grew well. American business prospered during that period.
I don’t shed any tears for American business, in terms of the tax rate overall. I think there could be a much more equitable code, in terms of the corporate tax, but I do not think that the 2 percent of GDP that’s being raised from corporate taxes, which is far lower than was the percentage 30 or 40 years ago, I do not think that’s an onerous number.
And for people who are getting 1/4 or 1/2 percent on their CDs, who have retired, and with American business earning, on tangible equity, which is the way they measure it, you know, probably averaging close to 15 percent, I think equity holders are getting treated extraordinarily well compared to debt holders in this economy. (Scattered applause)
Charlie?
CHARLIE MUNGER: Well, I agree with you, and I don’t die over these little differences in the tax code, either.
I live in California, of course, where — there’s, like, a 13 1/2 percent tax on long-term capital gains, nondeductible for federal purposes. That’s a ridiculous kind of a tax to have in California because it drives rich people out.
Hawaii and Florida have enough sense to know that rich people don’t commit a lot of crimes, they don’t burden the schools, and they provide a whole lot of medical expenditures that are good for everybody else’s income.
I think California has a really stupid tax policy. But I don’t think the U.S. — but I don’t think the U.S. policy is — (applause) — I don’t think the U.S. policy is bad at all.
WARREN BUFFETT: And it’s nondeductible because of the alternative income tax —
CHARLIE MUNGER: Yes, exactly.
WARREN BUFFETT: Yeah. That really wasn’t the case before, but it —
CHARLIE MUNGER: No, it’s always —
WARREN BUFFETT: — kind of slipped in.
CHARLIE MUNGER: No, they did it on purpose. (Laughter)
No, they did it on purpose.
WARREN BUFFETT: Early stages of paranoia. (Laughter)
CHARLIE MUNGER: Yeah. But it is — it’s amazing. The idea of driving the rich people out, Florida is so much smarter than California on that subject. And it is really demented.
Who in the hell doesn’t want rich people coming in and spending in their state?
WARREN BUFFETT: Yeah, yeah. Remember that as you come here to Nebraska for the meeting. (Laughter)
I would say I really do think there’s some chance this year — and not a tiny chance.
I know both Ron Wyden and Orrin Hatch. They’re patriotic, they’re smart, they want to do the right thing. They’ve got different ideas about what the right thing is, there’s no question about that, but they also know they can’t get any place without cooperating.
But I think the real opportunity is if they work out of the public eye in doing — in working on something — and I wouldn’t be surprised if they are. I think that’s the way to get it done.
Charlie has always pointed out, what would have happened if the Constitutional Convention back there in Philadelphia had been held with every delegate running out immediately to tell the TV cameras how right he was and how wrong everybody else was.
It doesn’t accomplish much to dig in on positions, and not be in a position to compromise, because it takes a lot of compromise to write something when you have two different — fundamentally different — views on some important aspects of the tax code.
But those are two good guys, and I would not — I don’t think it’s impossible that we have a new corporate tax code within a year.