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Paulson Kicks Off New US Corporate Tax Reform Debate

by Mike Godfrey,, Washington

30 July 2007

Kicking off a new debate on the state of America's business taxation system, US Treasury Secretary Henry Paulson said Thursday that the corporate tax base is too narrow, and contains too many special interest tax breaks which hinder the most efficient use of capital. He suggested that now is the time for a "comprehensive look" at the whole area of business taxation.

"My goal is to promote the policies and conditions for economic growth that will maintain and enhance our competitiveness, and lead to greater American prosperity," Paulson declared in his opening statement at the US Business Tax Competitiveness Conference on Thursday.

"Our current business tax system is clearly not optimal. It includes ad-hoc policies and preferences that result in a narrow tax base and create distortions that divert capital from its most efficient use. These include: complex, targeted provisions; depreciation schedules without clear rationale; taxation of capital income that discourages saving and investment; and, double taxation of corporate profits that can lead to misallocation of capital," he added.

Paulson believes that the Bush administration has made "great strides" since 2001 to reduce the taxation of individuals and investments, but he argued that there is far more to be done in terms of simplification of the tax code.

"Systemic distortions impact not only corporate owners, the shareholders, but also the employees. When an inefficient business taxation system discourages marginal investments, our workers pay the price," he observed.

"Now, when our economy is in a position of strength, is an opportune time to discuss the business tax system and its impact on workers, investment, and the United States' ability to compete in the world marketplace," he went on to note.

The conference heard from a number of business, policy and academic leaders, including Michael Boskin, professor of economics at Stanford University and former chairman of the President's Council of Economic Advisors; Safra Catz, President and CFO of Oracle Corporation; Martin Feldstein, professor of economics at Harvard University and former chairman of the President's Council of Economic Advisors; Alan Greenspan, former Chairman of the US Federal Reserve Bank; Jim Owens, Chairman and CEO of Capterpillar, Inc.; and Fred Smith, Chairman, President and CEO of FedEx Corporation.

According to Paulson, a strong consensus emerged from the meeting that the US business tax system is far from optimal, and is undermining the country's competitiveness.

"It is clear from our discussion that America needs to remain alert and responsive to changing global economic conditions. Other nations have seen the results of the bold tax reforms enacted by the US in the 1980s and they have moved to follow our example. And with much of the world having reduced their corporate rates, we now have the second highest statutory corporate tax rate among OECD nations," he stated.

Paulson indicated that the Treasury would develop specific follow-up steps in the coming months to build support for the need to improve the US business tax system.

"It is important to act comprehensively and prudently, rather than respond on an ad hoc basis to current headlines. Promoting an efficient business tax system is a high priority for me," he concluded.

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