Berkshire Hathaway 2013 Annual Meeting Audience Question # 10

Corporate profits as a percentage of GDP are at an all-time high

Warren Buffett:

OK. Carol?

Carol Loomis:

This question comes from John Custabal of the Philadelphia area.

Mr. Buffett, you have said in the past, specifically in a 1999 speech that was printed in Fortune, quote, “You…”

Warren Buffett:

You would bring that up, wouldn’t you?

Carol Loomis:

I would bring that up, right. I’m so glad he sent this question.

“You have to be”… you have said, “You have to be wildly optimistic to believe that corporate profits, as a percent of GDP can, for any sustained period, hold much above 6 percent.”

Corporate profits are now greater than 10 percent of GDP. How should we think about that?

Warren Buffett:

What we should think is pretty unusual, and particularly considering the economic backdrop.

Corporate profits are extraordinary, as a percentage of GDP, at least looking back on the history of the United States.

And what’s interesting about it, of course, is that American business, to a great extent, is complaining enormously… or frequently, anyway… about the level of the corporate income tax.

Now, the corporate income tax is about half what it was 40 years ago, as a percentage of GDP.

But yet, as you point out, corporate profits are at an all-time record, as a percentage of GDP.

So I would have you take with a grain of salt the complaint that American business is noncompetitive because of our corporate income tax rate, which gets so widely complained about.

American business has done extraordinarily well at a time when inequality, actually, is… has widened considerably… both measured by net worth and measured by income, if you take the top versus the people down below.


Well, we heard from one of the people here.

And, it will be interesting to see whether these levels can be maintained.

Corporate… business has come back very, very strong, in terms of profits, from the precipice that we were on in the fall of 2008, the panic.

Employment has not come back, the same way. And that’s going to be, I would say, a subject of a lot of public discourse. And you’re seeing… you’re reading more about that, currently.

If I had to bet on whether corporate profits would be 10 percent of GDP… and, of course, we’re talking about profits that are earned outside the United States, I believe, in that… in the figures you quote… I would say they’re likely to trend downward.

But I think that, of course, GDP will be growing, so that does not mean any terrible things will be happening to profits.

Charlie, what do you think about the…?

Charlie Munger:

Well, I wouldn’t be too surprised if that 6 percent figure turned out to be on the low side, in the estimate.

Just because Warren thought something 20 years ago, doesn’t mean it’s a law of nature.

Warren Buffett:

We’ll talk this over at lunchtime.

How do you feel about 10 percent?

Charlie Munger:

Well, I’m a natural conservative on such items.

But you’ve got to recognize that the stocks themselves are owned by a lot of endowments and pension funds and so on. So it… that figure doesn’t mean that the world’s becoming grossly more unequal.

There’s no automatic correlation between those two figures.

Warren Buffett:

Do you feel the corporate tax rate is too high?

Charlie Munger:

Well, I think when the rest of the world is… keeps bringing the rates down,…there’s some disadvantage to us if we’re much higher. So I…

I rather like Warren’s idea that people like us should pay more, but the corporate tax rate, I’m glad to have lower.

Warren Buffett:

OK. He’s the Republican; I’m the Democrat.

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