The U.S. government may be coming to take a larger bite out of corporate profits, and Berkshire Hathaway chairman Warren Buffett wants to be prepared.<\/p>\n
When asked at Saturday\u2019s annual shareholder meeting why he\u00a0sold\u00a0115 million shares of Apple over the past quarter, the Oracle of Omaha predicted companies like his could find themselves handing over more of their earnings to Uncle Sam. And he for one is fine with the idea.\u00a0<\/p>\n
\u201cWith present fiscal policies, I think something has to give. And I think higher taxes are quite likely,\u201d he said, lecturing other companies for constantly scrutinizing the tax code for the smallest loopholes that can reduce their tax burden.<\/p>\n
Under the Trump administration, the statutory rate for corporations was\u00a0reduced to 21%\u00a0in 2017 from a previous 35%, and Buffett recalled it has been much higher in the past.\u00a0<\/p>\n
\u201cThey may decide that someday they don\u2019t want the fiscal deficit to be this large, because that has some important consequences. And they may not want to decrease spending a lot, and they may decide they\u2019ll take a larger percentage of what we earn, and we\u2019ll pay it,\u201d he said during his first shareholder meeting since the passing of longtime business partner Charlie Munger.\u00a0<\/p>\n Buffett has repeatedly advocated that those who can pay more taxes should do so, famously saying his secretary paid a higher tax rate than he did. The Biden administration is now looking to address that in the election year with a proposal for higher capital gains taxes, including on unrealized gains.\u00a0<\/p>\n As a result of the growing inability of D.C.\u2019s political elites to agree on how best to tackle U.S. government debt, S&P Global in 2011 stripped the country of its AAA sovereign debt rating\u2014something Buffett criticized\u00a0at the time. The ratings agency has\u00a0since been joined\u00a0by Fitch, which downgraded the U.S.\u00a0last year\u2014and Moody\u2019s is\u00a0expected to follow.\u00a0<\/p>\n The broader topic of the national debt lends itself to misconceptions when people think of it in terms of personal debt. While the level must be managed prudently\u2014U.S. national debt now stands at over $34 trillion, or 122% of the economy\u2014it is not something that has to be paid off like a homeowner\u2019s mortgage.\u00a0<\/p>\n Not even companies pay off their debt\u2014many simply negotiate terms under which they can roll it over. In fact, investors demand that companies gear their\u00a0balance sheets\u00a0based on their risk profile, because if they don\u2019t they won\u2019t produce high enough returns on their equity. Indeed, the business model of buyout firms like Blackstone and Carlyle relies on optimizing the capital structure of a purchased company.<\/p>\n Each country\u2019s experience with debt is different\u2014and it doesn\u2019t always depend on the size of the debt.<\/p>\n Japan, for example, has shouldered far more debt than Greece, but\u00a0until late last year\u00a0it was predominantly held by domestic investors, a stable source of funding much like a bank\u2019s guaranteed depositor base. Greece, however, was\u00a0reliant on international investors\u00a0who can shift their money from one jurisdiction to another at a moment\u2019s notice.\u00a0<\/p>\n If spent on productive assets, debt is a useful tool for governments to improve their economy\u2019s growth or resilience without resorting to taxation. Crisis only hits when investors lose faith in a government or a company\u2019s ability to service its debt and the situation spirals out of control in a destructive feedback loop that sees investors demanding ever higher premiums to offset ever rising risk.\u00a0<\/p>\n Economists argue over where the tipping point hits when the level of debt as a proportion of the overall economy is no longer sustainable. But the U.S. enjoys three major advantages that explain why the debt hasn\u2019t been a problem yet.\u00a0<\/p>\n For one, it has a highly flexible and resilient economy capable of adjusting to external shocks better than most industrial nations\u2014this offers investors a more attractive return than parking their money elsewhere.\u00a0<\/p>\n It also has the deepest and most liquid sovereign debt market in the world, crucially allowing it to serve as a safe haven for capital in times of crisis\u2014which is precisely when this advantage is needed the most. And finally, it has the world\u2019s reserve currency so there is always a need for dollars, and the preferred means of holding them is through interest-bearing Treasuries rather than cash.\u00a0<\/p>\n \u201cMy best speculation is that U.S. debt will be acceptable for a very long time, because there is not much alternative,\u201d said Buffett.<\/p>\n If anything, the U.S.\u2019s problem is that too many administrations\u2014both Republican and Democratic\u2014have become complacent about the issue since Bill Clinton balanced the budget, knowing full well there has been no attempt at addressing burgeoning risks from the U.S.\u2019s\u00a0unfunded entitlement programs\u00a0for Medicare and Social Security.\u00a0\u00a0Subscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up for free.<\/p>\n","protected":false},"excerpt":{"rendered":" Warren Buffett predicts that companies like his may have to pay higher taxes in the future, and he is fine with the idea.<\/p>\n","protected":false},"author":6,"featured_media":10879,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"Default","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[247,1902,8930,492,3397,3492,1766,186,6862,5907,1512,5663,33,6262,3599,4736,5099,5255,3832,898,1992,4893,7300,641,26,1600,569,5576,4055,5217,8903,304,4081,415,5001,747,3767,9092,899,187,3404,2796,2042,7962,4920,7154,5050,1346,2628,4842,4671,1022,3126,4054,827,4441,3798,6386,7155,1959,3480,1065,6917,4556,4738,1183,973,841,6305,18],"class_list":["post-10878","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-other","tag-apple","tag-bank","tag-berkshire-hathaway","tag-biden","tag-biden-administration","tag-bill","tag-budget","tag-business","tag-capital-gains","tag-capital-gains-taxes","tag-cash","tag-chairman","tag-companies","tag-consequences","tag-corporate-finance","tag-corporate-profits","tag-corporations","tag-crisis","tag-currency","tag-debt","tag-decrease","tag-demand","tag-domestic-investors","tag-earnings","tag-economy","tag-election","tag-finance","tag-fine","tag-fiscal-deficit","tag-fiscal-policies","tag-follow","tag-funding","tag-future","tag-government","tag-government-debt","tag-greece","tag-growth","tag-higher-taxes","tag-interest","tag-international","tag-investors","tag-issues","tag-japan","tag-jurisdiction","tag-loopholes","tag-medicare","tag-medicare-and-social-security","tag-meeting","tag-money","tag-national-debt","tag-proposal","tag-republican","tag-resilience","tag-risk","tag-security","tag-service","tag-shares","tag-situation","tag-social-security","tag-speculation","tag-spending","tag-tax","tag-tax-burden","tag-tax-rate","tag-taxation","tag-taxes","tag-treasury","tag-trump","tag-who","tag-world"],"acf":{"keyphrase":"","keywords":"","sourceimg":"","country-category":""},"yoast_head":"\nBuffett sees no alternative to U.S. Treasury bonds<\/h2>\n