Paulson Wants Shakeup of Corporate Taxes

"Our current business tax system is clearly not optimal," Paulson said. He said the question that must be asked is what kind of tax regime will best maximize "job creation and economic growth."

"Now when our economy is in a position of strength, it 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 global economy," he said.

Paulson said that the current system "includes ad-hoc policies and preferences that result in a narrow tax base and create distortions that divert capital from its most efficient use." He said that the U.S. tax code was riddled with complex, targeted provisions that hurt the country's overall economic performance.

Paulson's comments came at a one-day conference the administration was sponsoring to review business taxes and the impact they have on economic growth and job creation in the United States. The conference attracted a number of Wall Street and corporate luminaries and leading economists, including former Federal Reserve Chairman Alan Greenspan.

Greenspan said he believed that interests rates around the world would not stay as low as they are now. "The cost of capital is not going to stay down at this level," he said.

He said that while lower corporate tax rates can boost productivity, it was unlikely that the political system in the United States would support such a move, especially after the baby boom generation begins to retire, causing big increases in government spending for Social Security and Medicare.

He said this opposition will occur even though economists widely agree that lower corporate tax rates can boost jobs by increasing productivity.

"Regrettably, there is still a great deal of populism in this country," Greenspan said.

The administration's conference comes at a time when a number of Democrats in Congress have put forward legislation that would boost taxes on hedge funds and private equity firms as a way of getting money for their initiatives such as protecting middle-class taxpayers from having to pay the Alternative Minimum Tax, which was originally designed to cover only the wealthy.

In addition to Greenspan, who served as head of the Fed for 18 1/2 years, other participants were Martin Feldstein, a Harvard economics professor and Council of Economic Advisers chairman in the Reagan administration; and Michael Boskin, the council's chairman in the administration of President Bush's father and currently an economics professor at Stanford University. The leaders of such major corporations as Oracle Corp., Caterpillar Inc. and Fed Ex were also participating.

In an opinion piece published last week, Paulson did not make any specific recommendations for ways the tax code should be changed. But he said areas that should be examined include taxes that discourage capital formation, the current tax depreciation system which does not treat investments uniformly, and targeted tax provisions that add to the complexity of the tax code and contribute to the estimated $40 billion that businesses spend annually on compliance.

Paulson wore in The Wall Street Journal piece that two decades after President Reagan succeeded in getting Congress to pass the landmark 1986 tax overhaul legislation which cut rates, the United States now has the second-highest corporate tax rates, on average, of any major industrialized democracy.

He said the average combined federal-state corporate tax rate stands at 39 percent, compared to an average of 31 percent for other major industrialized countries.