2017: How much of a tax rate reduction will Berkshire pass on to its customers?

JONATHAN BRANDT: If corporate tax rates are reduced meaningfully, Berkshire will enjoy a one-time boost to book value because of its sizable deferred tax liability, and its go-forward earnings should be higher, too, at least in theory.

How much of the reduced tax rate will be passed along to Berkshire’s customers through, for instance, lower electricity rates or lower railroad shipping rates? And how much will go to Berkshire shareholders?

WARREN BUFFETT: Yeah, the question is, in the case of our utility businesses, all benefit of lower tax rates goes to customers. And it should be, because we are allowed a return on equity — in general — I mean, I’m simplifying a little bit. But the —

We’re allowed a return on equity that’s computed on an after-tax basis. And the utility commissions would, if taxes were raised, would presumably give us higher rates to compensate for that.

And if taxes are lowered, they would say, “You’re not entitled to make more money just because tax rates — on equity — because tax rates have been lowered.” So forget about the utility portion of the deferred taxes.

The deferred taxes that are applicable to our unrealized gains in securities, we would get all the benefit of. Because I mentioned we had 90 billion-plus of unrealized gains. And if the rates were changed on those in either direction, our owners, dollar for dollar, will participate in that.

And then you get into the other businesses. You mentioned the railroad, but it can be all of our other businesses.

To some extent, if tax rates are lowered, to different degrees in different industries, depending on the number of players, the competitive conditions, some of it may — some if it almost certainly gets competed away. And some of it would likely not be competed away.

And that’s — you know, economists can argue about that a lot. But I’ve seen it in action in a lot of cases.

You got a big decline in rates, for example, in the U.K. And we’ve had them over my lifetime. We had 52 percent corporate rates. You know, we’ve had a lot of different numbers.

So I have seen how behavior — economic behavior — works. And I would say that it’s certain that some of any lower rate would be competed away. And it’s virtually certain that some would enure to the benefit of the shareholders. And it’s very industry and company specific in how that plays out.

Charlie?

Well, we — dollar for dollar, I mean, there’s 90 or 95 billion, if the rate were to drop 10 percent, that 9 1/2 billion is — by 10 percentage points — that 9 1/2 billion’s real.

On the other hand, if it goes up as it did — went up from 28 to 35 percent, they can take it away from us, too.

CHARLIE MUNGER: Well, I think it’s true that we’re peculiar in one way. If things go to hell in a handbasket and then get better later, we’re likely to do better than most others.

And we don’t wish for that. And we don’t want our company to have to suffer through it. And we fear what might happen if the country went through the ringer like that.

But if that real adversity comes, we’re likely to do better in the end. We’re good at navigating through that kind of stuff.

WARREN BUFFETT: Yeah, and occasionally, there will be —

CHARLIE MUNGER: A lot — in fact, we’re quite good at it. (Laughter)

WARREN BUFFETT: There will be occasional hiccups in the American economy. Doesn’t have much to do with who’s president or anything like that. Those people may get blamed or given credit for different things.

But it’s just — it is the nature of market systems to occasionally go haywire in one direction or another. And it’s been ever thus, you know, and it’ll be ever thus.

It’s not — it does not have a — there’s not a — it’s not a — on a regular sine wave-type picture or anything of the sort. But it’s certain to happen from time to time.

And we will probably have a fair amount of money and credit at that time. And we certainly —

We’re not affected. When the rest of the world is fearful, we know America’s going to come out fine. And we will not have a trouble — any trouble — psychologically, acting at all.

And then the question is how much do we have in the way of resources? We’ll also never put the company in any kind of risk just because we see a lot of opportunities. We’ll grab all the ones we can that we can handle. And not lose a day of sleep.

(Someone shouts in the audience)

I didn’t quite get that. But — In any event, we will now go to station 4.