Former Treasury Secretary Hank Paulson told CNBC on Friday he's "troubled and disappointed" by the Obama administration's stopgap answer to trying to prevent corporate inversion deals.
"The root cause here is this antiqued, outdated tax system that puts U.S. corporations, multinationals, at competitive disadvantage with their foreign competitors," Paulson said in a "Squawk Box" interview. "This hurts national economic security."
The corporate tax system needs to be overhauled, he added.
The Treasury Department took new steps this week to curb inversions, in which a U.S. company reincorporates overseas following the purchase of a foreign company. The biggest of these deals, the $160 billion combination of New York-based Pfizer and Dublin-based Allergan, fell apart.
The U.S. needs to make it more cost effective for American companies to bring overseas profits back to the U.S., Paulson said.
He said the U.S. needs to move to a territorial system, "and have American companies pay their taxes, whatever is the going rate is there, and then not penalize them for bringing their money back."
Paulson, a former chairman and CEO of Goldman Sachs, headed the Treasury in the George W. Bush administration from 2006 to 2009, in the lead up to and during financial crisis.
He helped engineer the Troubled Asset Relief Program (TARP) — the bailout credited with preventing the collapse of the financial system.