Tom: On the other hand-- you'd have members of this administration and others who are adherents of this administration saying, "The great lesson-- of the last 20 years has been: cut taxes. Fewer taxes, especially for the wealthy. That helps the whole economy. We wouldn't have gotten through the post-9/11 period without the tax cuts that George Bush pushed through."

Warren: Tom, I've been around rich people all my life. And I have seen capital gains taxes close to 40 percent. No one went home at 3 in the afternoon and said, "I've worked enough, and because tax rates are so high, I think I'll-- I'll go to the movies." I mean, people-- people want to maximize their after tax income, and there's two ways to do it. In-- increase their income, or get Congress to lower the tax rates for them. But I have never seen anybody with capital say, "I'm going on strike. I won't invest." I-- I've been managing capital for 50 years for other people. No one left and said, you know, "This-- the taxation system's too tough. I-- I think I'll just stick it all under my mattress." They can't stick under their mattress. They're going to invest their money regardless.

Tom: When you talk to presidential candidates-- and you-- you've been now outspoken about your preference for Democrats--

Warren: Yeah.

Tom: --when you put this before Hillary Clinton, or Obama, or the people who come to see you--

Warren: Both the people you mention have heard me talk about it--

Tom: Right.

Warren: Yeah, probably more than they'd like to.

Tom: But they haven't moved it to the top of their agenda.

Warren: Well, it's-- if you read-- if you read Obama's book, for example--

Tom: Yeah.

Warren: --it's in there. And if you talk to Hillary-- no. I think-- I-- I think in general they feel that the middle class and-- and-- and really the lower class in terms of income have-- have gotten too much shoved on them. And-- and it's been-- it's been to benefit the rich. It-- but it-- it has not been the main thrust of anybody's campaign.

Tom: Have you ever seen a tougher time in many ways for the middle class in this country?

Warren: Well, the middle class is a lot better off than it was 50 years ago, or 100 years ago. I mean, it-- it is true that if the economy improves, everybody benefits. So-- so it is-- it was a lot tougher, you know, 50 years ago. It was tougher 30 years ago. They-- people have improved their standard of living. But-- but if you look at the cutoff point on the Forbes 400 20 years ago, 21 years ago I think, it was a hu-- it was $190 million. It's now a-- a-- a billion three hundred million. I mean, it's up roughly seven for one. I will guarantee you that the working stiff is not up seven for one in the last 20 years.

Tom: You have some interest in China… Has that been complicated for you, your investments in China and the kind of attention that you've gotten with it?

Warren: Well, not-- not really. I mean, we-- we bought PetroChina stock when it wasn't so well known. Last week at one day, it was the second most highly valued company in the world next to Exxon Mobile. It was above General Electric. I mean, it was number two in the world. So, the Chinese have made enormous progress in the last ten or 15 years. And-- and-- and they'll continue to make progress. What they're doing is they're finding out what the human potential is. I mean, they've always had an incredible number of smart people, energetic people. But their system didn't allow those people to develop their potential. And now they're doing it.

Tom: They're taking a look at Bear Stearns. You've got a lot of friends at that-- house on Wall Street. That make you nervous at all that the Chinese will become involved in our capital markets in such a direct fashion?

Warren: Well, Tom, everyday-- net we're going to buy about $250 billion worth of goods and services from China beyond what we sell to them. So, we're handing them, call it $700 million a day. And what are they gonna do with it? We don't expect them to stick it under the mattress. They have to invest in something. They can buy stock in Bear Stearns. They can buy U.S. government bonds. They can buy real estate here. But we are force feeding dollars to them, and we're taking their goods in exchange. And for them to want to do something with those dollars-- it's perfectly understandable.

Tom: Does it make you anxious?

Warren: No. Well, it-- there are things about the whole foreign exchange situation that make me a little anxious. But it-- it is not specific to the Chinese at all. We are making free decisions everyday to buy their furniture, or buy their-- buy their shoes, or whatever it may be.

And we give them-- we give them a little piece of America in exchange. That's the nature, because you gotta give 'em something in exchange for it. And-- and-- we're not giving 'em enough products.

Tom: You've got a lot of fans out there, but some people have said you could have a lot greater influence on social justice in China in the human rights area, if you use the leverage of your investment—there, in that fashion. Is that tempting to you?

Warren: No. I-- I don't seem to be able to use the leverage of my investment in the United States (LAUGHTER) to do anything about tax policy. So, I-- the-- the Chinese government is going to behave in their own self interest to a great degree like the U.S. Government. When our values clash with theirs, that's something to be worked out basically government to government.

But-- we have been treated very well in terms of our investment in PetroChina. Twenty-nine of the 30 largest companies that are publicly owned in China are controlled by the Chinese government. That's a fact of life in China.

So-- all-- the three major oil companies, they're all-- they all have a majority of their stock owned by the Chinese government. And you can go up and down the lines, the banks, and the life insurance companies and everybody else. So, you are-- you are going into a state controlled company when you buy stock in China. But-- they've done pretty well by their-- by their investors. And-- and-- they don't like some of our policies, and we don't like some of their policies. And--

Tom: Do you-- do you raise that with them?

Warren: No. No. No. I-- if I-- if I raised with-- take the stock. It's something we own in the United States, I raise tax policy with them, do you think (LAUGHTER) is that gonna change what the U.S. government does? No. It's-- it's determined by other factors.

Tom: Do you think the 21st century will be the century of China?

Warren: Well, certainly China is going to gain economically relative to the rest of the world in this-- in this century. There's no question it that. They're galloping forward. They come from a very low base, and-- and-- and that's gonna cause a lot of problems for people.

I mean, we-- we worry about, you know, global warming or something like that. But we're using 12 times as much oil per capita-- as China. Now as they use more, if we start pointing fingers at them, I think they're entitled to point fingers back at us. We're the ones that have been using up the resources of this planet-- at a-- a clip far beyond-- you know, our per capita-- position in the world.

So-- I-- I think China is going to be-- I think they're going to be moving pretty fast in terms of-- economics. And it'll take 'em a long time, because the base is so low. But-- they will be a big story.

Tom: When you look at China as an investment, however, don't you have to factor in more fully the politics of China than you do-- when you're making an investment in this country--

Warren: Sure.

Tom: Or in western Europe?

Warren: Sure. No. You're going into a different society. And-- and they aren't gonna change their society dramatically to-- adapt to us. But we're still delighted to go in there. But they-- that's true around the world generally. But obviously in China, there you've got a-- you've got a planned society in effect. And-- and-- and it's different than the United States.

Tom: A lot of wealthy people that I've talked to have said about this, "But Warren doesn't factor in how much we pay in state taxes, you know." Those who live in New York-- face a very heavy tax burden. Their estate taxes in New York, to some of them, seem confiscatory. So, it balances out over the long haul.

Warren: Well, the state taxes go to states. But we still have $2.6--

Tom: Yeah.

Warren: --trillion raised for the federal government. And-- and the state taxes obviously vary enormously. But the disparity-- the rich-- the-- the very-- the super rich at the federal level are paying lower tax rates to the federal government. That is not true on the-- on the state level. But that-- you know, if somebody pays a high tax rate in-- in-- in New York, they can always move. I think there's close to a dozen states that don't have an income tax. My friend, Bill Gra-- Gates, was in Washington. They don't have a state income tax. So, there-- there are options available on that. There are not options available to the poor on the federal income tax.

Tom: If the taxes get raised on the super wealthy, do you think it'll cut into philanthropy?

Warren: No. No. If you look at philanthropy in this country, it's been about two percent of GDP. We've had 70 percent tax rates. We've had 40 percent almost tax rates on capital. We've all kinds of different tax rates. Two percent of GDP end up going to philanthropy. It won't change things.

Now the estate tax, incidentally, I mean, the estate tax raises about $30 billion a year. That $30 billion, which some people want to get rid of, that would provide a $1,000 a family to 30 million families. If you take the 30 million poorest families in the United States, a $1,000 each would make a difference to every one of 'em. The $30 billion raised through estate taxes-- just guess how many people die in the United States every year. It's a little over 2.4 million. How many people will pay an estate tax this year? How many estates will pay a tax? About 12,000. One out of every 200.

So, by letting one out of every 200 off the hook, you get rid of a sum which would give a $1,000 to every one of 30 million poor families. I mean, I think it's an outrage that-- that people talk about, you know, getting rid of an estate tax that only gets one out of every 200 to start with.

Tom: Executive compensation. You feeling any better about it?

Warren: (LAUGHTER) Well, I-- I-- I feel fine with people making a lot of money for doing a great job. I mean, you know, the people in your field that do a great job make a lot of money. (LAUGHTER) ….

Yeah. But-- what-- what I object to is the people that the-- the biggest payday of their life is the day that they leave a company from which they failed, or-- or where they get paid automatically big sums. If you want the shot at the brass ring-- if you want a shot at making tens of millions of dollars a year, if you flop, why in the world should you be making $5 million a year, or $3 million a year? That-- it's-- pay for performance is fine, you know. Pay for showing up is not-- with the-- with the huge goodbye present, you know-- or-- or bonuses that are not tied to real performance, I think that's terrible.

Tom: But, again, that's not getting very much attention. I mean, it was hot for a while.

Warren: It was hot for a while.

Tom: It's gone away.

Warren: Now, well-- the CEO cares enormously. The comp committee doesn't care …. I mean, if you-- you-- if-- if-- if the CEO is negotiating with a labor union, they stay up 'til 3 in the morning, and they do it over the weekends and everything else. And they worry about a few cents per hour. The comp committee meets for a couple of hours. I've never heard of a comp committee meeting at 3:00 in the morning, you know.

Tom: Right.

Warren: Or staying there over the weekend to negotiate with the CEO. So, you've got this intensity of-- of caring on the part of one party to the negotiation. And you've got people on the other side to whom often it's play money.

Questions? Comments? Email me at buffettwatch@cnbc.com