Paulson Says U.S. Tax System Distorts Capital Flows

Thursday, 26 Jul 2007 | 9:25 AM ET

U.S. Treasury Secretary Henry Paulson said on Thursday the U.S. business tax system creates distortions in the allocation of capital and must be re-examined to boost the competitiveness of American companies.

"Our current business is clearly not optimal," Paulson said in prepared opening remarks to a business tax competitive conference at the Treasury.

"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," Paulson said of the tax system.

"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 the misallocation of capital," he added.

Paulson said the U.S. business tax system must take into account the reality of an integrated global economy where capital can flow freely across borders. It should not discourage investments into the United States by foreigners nor investments abroad by U.S. firms.

Speakers at the conference include former Federal Reserve Chairman Alan Greenspan, Caterpillar Chairman James Owens, FedEx Chairman Frederick Smith, and Michael Boskin, economics professor at Stanford University.

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