Treasury Secretary Paul O'Neill Wants To Abolish Corporation Tax

by Jeremy Hetherington-Gore, Tax-News.com, London

21 May 2001

In an interview given in his Treasury Department office to the Financial Times, Paul O'Neill, US Treasury Secretary, called the US tax system 'an abomination' and said he would like to abolish corporation tax and capital gains tax for business altogether.

Like Mrs Thatcher before him, and other right-wing economic leaders, Mr O'Neill understands that only people pay taxes. It's an illusion to suppose that the tax paid by companies doesn't in some way cost the man in the street the same amount of money, although of course the price is paid in a very roundabout way.

One of the main economic justifications for abandoning business taxation is that this is an inefficient and inherently unfair way of collecting tax. Businesses, especially large international ones, have far more scope for avoiding tax legitimately than do individuals, who can and do cheat on their taxes, but are taking big chances by doing so. The corporate tax avoidance industry in the US is vast, and its costs are a dead weight on the economy. Tax lawyers will be right against the abolition of corporation tax, but then they don't have many friends and can retire to the Bahamas to enjoy the fruits of their past labours.

The problem with abandoning direct taxation of business is that the perceived benefit for citizens (lower prices) is heavily outweighed in political terms by the inevitably higher personal taxation that has to replace it. Corporate taxation in the US accounts for about 10% of the total tax take, which if translated into personal income tax terms would involve a rise of about 15% in income tax collection. What politician is brave enough to put this equation to voters? It's the sort of thing that a Government can get away with at the beginning of its term and if it has a large majority in the legislature. There isn't a cat in hell's chance that such a measure would get through the Congress in its present form.

Mr O'Neill said in the interview that simplification of the tax code would improve US global competitiveness. "It would certainly make us more formidable if we had a simplification of this sort." That's obviously true, but that sort of argument doesn't resonate with voters, even if it should, since it brings them more jobs. Ironic though that Saint O'Neill, who has just won the respect of Democratic Congressmen by standing up to the OECD over their 'unfair tax competition' initiative, should now propose a reform which would make the Foreign Sales Corporation tax break redundant, thereby taking a massive slice out of the revenues of many of the Caribbean islands he has just befriended. And what about the Bermudian insurance industry? Poor, brave Mr O'Neill will find that he has more enemies than friends on Monday morning.

Mr O'Neill also wants to reform the Social Security system; he questions the guarantees the government provides for full public subsidy of senior citizens' health care and retirement programmes. "Able-bodied adults who have the ability to earn income have an obligation not to pass part of their own responsibility on to a broader population," he said.

Says the Financial Times's interviewer, Amity Shlaes, herself as far to the right as it's possible for a Financial Times journalist to be without having to go to work for the Daily Telegraph: 'Mr O'Neill's remarks are bound to reverberate in Washington, where speaking about reductions in elderly care programmes has been taboo. His remarks reflect growing determination in the Bush administration to show its willingness to propose radical change to try to secure growth.'

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