Transcript: Interview with Paul O'Neill, US Treasury secretary

The FT interviewed Secretary O'Neill on May 17, 2001 in Washington. The transcript of that interview follows.

FT: What is O'Neill's vision?

O'Neill: We should start with where we are with this tax bill.

It seems to me at least at the moment we're going to have a major tax reform bill signing ceremony in the Rose Garden hopefully on a bright sunny day next Friday, which is a breathtaking prospect compared to where we were in January, when most of the smart money would have bet we weren't get any tax reform before the very end of this year at the earliest and if we did it would be very substantially different from what the president recommended.

And in fact I think at the moment all of the principles that the president articulated over the last two and a half years are going to be encompassed and embedded in this tax reform, including marginal rate cuts, importantly, and a child credit, and something about the marriage penalty, and repeal of the death taxes.

It won't be as fulsome as what the president recommended because they took a couple hundred billion over the ten- year period out of the total amount that's available. But even at that it's probably . . . I look at it as $1,350bn against the prospect of what six months ago one might have said was going to be $500bn.

So I think this is a huge ratification of the president's view. But at the same time it incorporates the principles [that the president desired] and it moved in the right direction.

It's clearly not the final thing that we need to do about tax reform - in two different ways. Even within the context of the principles there is going to be a slower implementation of what the President recommended and that's something that needs to be tended.

There's a whole set of questions about a capital gains tax relief and the value that our growth economy could get out of that, which is something to continue thinking about. And on the bigger stage there is a longer-term set of issues related to the very structure of our tax system.

And in that regard I have been observing now for the last four months . . . that the tax code is 9,500 pages and while every word has a reason and a sponsor and every piece of punctuation has a reason and a sponsor, when you put the 9,500 pages and punctuation together it's just an abomination.

It's interesting. I get lots of mail from individual citizens telling me about the horror stories of their own encounters of filling out the responses to the tax code.

I have one in the last few days from someone who said that they ended up paying $95,000 in taxes last year - a lot of money - and bitterly complaining not about the amount of money that they paid but about the amount of time and drudgery that they had to go through to try to figure out exactly what it was that they owed. And then weren't satisfied at the end of all that they have truly understood and complied with what the supposed law of the land is.

And I tell you there is no more guaranteed applause line in speaking to audiences across the country than to say that we need to we're determined to fix the tax code so that it is understandable by ordinary mortals.

And not only am I committed to working on this issue the president [George W. Bush] is also intrigued about the possibility of fixing this mess-that we all know has been getting worse and worse and worse.

FT: What are some of the areas you see needing fixing?

O'Neill: I guess on the broadest stage [there is] the whole issue of, in an economic sense, who pays taxes? For a long time we've maintained what I think is clear as a fiction the idea that somehow corporations and businesses pay taxes.

The clear economic truth is that businesses and corporations don't pay taxes, they just collect them for the government. Because businesses and corporations have to recover all of their costs and earn the cost of capital, after all of their expenses including taxes.

And so every bit as much as companies have to have enough income to pay their salaries and their raw material costs they have to have enough income to pay their tax costs. And it comes in the form of the price that they charge for goods and services. And so in fact however much people might not like to believe it taxes that are collected by businesses and corporations come from the prices that people pay for the goods and services.

The corporations and businesses are just an intermediary between the citizens and the government. And the cost of that intermediate process is enormous because the corporate and business part of the tax code is unbelievably complicated and requires to engage and employ hundreds of thousands of highly trained and technically competent people to thread their way through the tax code. And the cost of doing that also has to be recovered through the price of the goods that people pay.

So it's not just the direct amount of the tax, but the administrative cost of running the tax process through the businesses and corporation that we could effectively eliminate. All of the administrative 'pushback' costs that are now in goods and services, prices [could be eliminated], if simply we gave up that part of it and collected taxes in a more direct way from the people who were paying the taxes in any event.

FT: So you would eliminate the corporate income tax?

O'Neill:Absolutely. In economic logic there is no reason to have this phoney process as though somehow individual human beings didn't pay the taxes that are embedded in the prices of goods and services.

FT: What about capital gains taxes on business?

O'Neill: Again, left to work in the most satisfying theoretical way [we can say that] if there weren't any corporate and business taxes there sure as hell wouldn't be corporate and business capital gains taxes therefore there wouldn't be any need to lower the rates because there wouldn't be any rates at all.

Now there is a whole separate set of issues when it comes to individuals...At the most fundamental level [there is] the question of how much money 'we the people' as a collective group need to extract from each other to pay for public goods and services.

It starts with how much money do we need for national defence and national security, which is clearly a federal responsibility, a national responsibility that we need to discharge as a total population.

Rather than think about taxes from the bottom up we need to think about spending requirements from the responsibility perspective first, and after we've decided what it is we need to do as a society then we need to figure out how we're going to pay for it.

And again, starting from fresh, we need to struggle with the question of what the appropriate level of income and wealth at which people ought to start paying 'their share' of the cost of socially needed and desirable goods.

FT: You're talking about two things, one is the tax burden as a share of the economy -

O'Neill: - and how we apportion it.

FT: And the other is that 50 million households currently pay no income tax [because US lower earners in the US are often effectively exempt from tax]. And what about the specific meaning of that when you have so many voters who are not participating in society.

O'Neill: Exactly. We need to visit the issues of what's the appropriate level of income at which people should start to contributing to the cost of society and then we need to deal with the issue of how progressive or how proportional the tax system should be related to income. In that regard . . . we've gotten to the issue of thinking about taxing income and wealth as though they are two separate things. And you can make an argument, I think a fair argument that people should be taxed on period income, which means the amount of income that comes in some particular calendar period.

But I think it's a further reach, which we're now in the process of unwinding, to say that when people die the government owns a whole lot of what they accumulated.

It's kind of ironic that it seems strange to some people to say that the government is not entitled to what you've accumulated during your lifetime, as an alternative to it belongs to your spouse and your children or your grandchildren. It's only a peculiar invention that suggests that this [death] is the point for the government to grab a bunch of assets.

And so, for me, if we talk about simplification and ordering our revenue collection, then it is useful to think the most fundamental questions as we work for simplification and the relative responsibility of people related to their income.

Not to say that I wouldn't deal with this on both sides of the income line. Because I do think that there's some merit to the notion that - for people who don't have the wherewithal to earn income - that we have a social responsibility for helping them.

And so in some form the idea of the Earned Income Tax Credit [America's negative income tax for lower earners] and even the form that we've developed of welfare reform three years ago - it seems to me that those are appropriate aspects for how to think about income and wealth generation within our population.

But we have to think about them all together, at one time, and not as though they were separate and divisible things. So that we have a more orderly process of explicitly, instead of implicitly, almost under cover dealing with these things on top of the table in the most forthright way possible.

And then make explicit decisions about what the proportionality of responsibilities are among the individuals of society. Is that radical enough?

FT: Is Social Security part of the package?

O'Neill:We need to deal with Social Security as soon as we can but frankly as I think about it I guess that conceptually I would include it inside the framework that I've suggested to you.

As a first principle, I think I would say that for able-bodied adults, there's a concept that has a lot of appeal to me that says: Able-bodied adults should save enough on a regular basis so that they can provide for their own retirement and for that matter for their health and medical needs.

Because to the extent able-bodied adults who are earning a reasonable income don't do then they are basically saying they want the broader society to accept the responsibility for part of their retirement and part of their health and medical care.

It seems to me it's a threshold issue that - able-bodied adults who have the ability to earn income have an obligation not to pass part of their own responsibility onto a broader population.

And here's a companion thought: [As for] those who can't for whatever reason [take care of themselves], the rest of us then should assure that they have an accumulation of assets so that they don't become an unexpected ward of the broader society.

Even those for those individuals who can't, for one reason or another, accumulate their own account, or accountability, for a certain future retirement or medical care costs, that as a society we should budget for those things and not let them hit us between the eyes.

Another point that I think is worth making:

A broader aspect of what I said to you about the corporate tax system. Because of the complexity of the tax system and the way it's structured now, we're imposing a cost on the society of let me say, for notional purposes, $200bn a year.

And I would argue that $200bn creates no value. In fact that for a very small fraction of that imposition of cost on society we could collect revenue that we needed to discharge agreed social responsibilities at the federal level.

As I've argued this issue with some economists, they said 'well, maybe so, but it's an imposition on our own people and therefore it's ok to do that.'

My argument against that is this: more an more in the broadest sense we are in competition with the all the rest of the world and to the degree that we burden our individual citizens and our companies with costs that effectively raise the prices now in a global sense compared to the prices of other places that we are unfairly disadvantaging our income- and wealth-producing activity. We're putting on a burden that's unnecessary and limiting in terms of our world competitiveness.

There's a really important reason not to accept the notion that 'well, this is a self-imposed additional cost and it's our business if we want to put this imposition on our society.' I think it has consequences, economic consequences for our position in the world, that are not justified. If we could pull that $200bn a year out of the prices of our goods and services, it would make them even more desirable to other consumers around the world than they are now.

FT: What else?

O'Neill:If we at the federal level could clean up our act and work more closely to what's possible, state and local governments would be enabled by our own action. because in an awful lot of cases now they are piggybacking on the federal system and they have their own level of complexity that flows from ours.

If we set a standard for simplification and ease of understanding, it's more likely that state and local governments would be able to do the same. They're caught in our backdraft, if you will.

So I think there are consequences even beyond the important question of the federal system. It would certainly make us more formidable if we had a simplification of this sort. It would make us more formidable in talking to other people around the world about what a proper tax system ought to look like. I sure as hell would not want to represent to other countries at the moment that they should adopt the US tax system.

© Copyright 2001 Financial Times

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