Paulson Says Tax Code Should Be Simplified

The Montana landscape reminds me a bit of the Illinois prairie, where I grew up. At an early age, I developed an appreciation for wide, open spaces. Although I spent thirty years of my career in investment banking, whenever we could, my wife Wendy and I would escape the cities and travel to places like Montana -- where we could hike and fish. I like to spend lots of time in wild, beautiful places and Montana is certainly one of those. Several years ago, we spent time at the Matador Ranch in North Central Montana, just north of the Missouri River; two years ago we enjoyed the Bozeman area. And today it's Billings!

I know that wide, open spaces are a foundation of your economy. But agriculture isn't the only thriving industry in Montana -- your economy is expanding, and taking advantage of the opportunities created by technology and trade. I look forward to talking with you today about important issues for the people of Montana and for all Americans -- what are the key factors that will continue our economic leadership and create new jobs in rapidly changing world markets? And what is the role of a rural economy, such as Montana's, in those markets?

The good news is that Montana is already very much a part of the global economy. In the five years between 2002 and 2006, total exports from Montana more than doubled to $1.4 billion. Agricultural exports were a big part of this increase; they grew from about $300 million in 2002 to almost $600 million in 2006. Your wheat, livestock and vegetables are being shipped around the world, and the overall export increase reflects an economy that is diversifying.

Montana, like the overall American economy, is growing. From 2005 to 2006, Montana's gross domestic product grew 4.6 percent -- higher than the overall U.S. average of 2.9 percent during the same time period.

There is also additional good news in the rate of growth in non-agricultural jobs -- a sign that while Montana retains its historical leadership in agriculture, it is also broadening its economic base. Since January 2001, approximately 55 thousand non-agriculture related jobs have been created. As new technologies and industries develop, Montana is keeping pace with the changing economy.

As Montana diversifies and produces more goods, the global economy will provide expanding opportunities if we remain committed to free trade, to promoting foreign investment, and to a business tax system that will help our companies and workers successfully compete.

Proven economic principles show that nations that open themselves up to competition -- in trade, finance, and investment -- benefit while those that don't are left behind. Openness to trade and competition fuels innovation and creates goodpaying jobs that raise productivity and standards of living in both rural and urban economies.

Despite this, more and more Americans seem to doubt that trade brings greater benefits than costs. This increase in protectionism is a worrisome trend. Trade is one of the cornerstones of our economic success as a nation. Retreating to economic isolationism would mean fewer jobs and lower incomes in Montana, in the U.S., and around the world. If we arbitrarily protect our markets, other nations will surely protect theirs. When farmers and companies have fewer options for exporting their goods, the impact will be felt by workers throughout Montana.

At every opportunity, this Administration presses our trading partners and other nations to keep their markets open, and to open them further. I recently returned from a trip to China where I had candid discussions with Chinese officials about a wide variety of economic issues, including the need for the Chinese to move more quickly to adopt market-oriented reforms which would reduce their trade imbalance with the United States.

In our rapidly changing economy, we see job losses and dislocations in particular companies, industries, and even regions -- just as there are new opportunities in others. But making trade a scapegoat and enacting protectionist policies would make us worse off. We should recognize the hardships and work to alleviate them, while keeping in sight the higher living standards Americans enjoy as a result of economic dynamism. The global economy is here to stay. To keep growing and leading the world in innovation and opportunity, the U.S. must trade freely, openly, and according to the principles of the global marketplace.

Four Free Trade Agreements -- with Peru, Colombia, Panama and South Korea -- are awaiting Congressional action. Approval of these FTAs is critical. Such agreements are a key element to continued U.S. economic growth. They also demonstrate our support for democratic countries that are working to develop greater opportunities for their citizens, which will in turn create new markets for goods from Montana and the rest of the United States.

To keep America competitive in a global economy, we must also welcome foreign investment. Foreign investment in the United States is the ultimate vote of confidence in our economy. It creates high-quality jobs, spurs innovation, and gives American consumers a wider variety of choices and lower prices on everything from food to clothes to cars. When we encourage open investment, foreign money supports local communities across a wide span of industries. In fact, U.S. subsidiaries of foreign companies play an important role in supporting jobs in Montana, supplying $3 billion in plant and equipment investment, and providing the livelihood for over 6,500 of Montana's workers.

The American economy today is healthy and we have low unemployment. However, we can not rest. Enhancing our future competitiveness, which means new and better-paying jobs and higher living standards for American workers, requires making sure that our policies respond to changes in the global marketplace. This includes a tax regime that does not burden our companies with complexity or put us at a competitive disadvantage when compared to other nations.

In the 1980's, we reformed and simplified the tax code. We closed loopholes and lowered individual and corporate rates. These tax reforms set the stage for "The American Miracle," twenty years of remarkable economic performance in the U.S. and around the world. Yet, since then we have moved in the opposite direction. Over the past two decades, U.S. tax law has grown more complicated and our statutory corporate income tax rate has increased, while other nations have been reducing their rates. In comparison to our major trading partners, the U.S. has moved from a country with below-average corporate tax rates to one with above-average rates. Instead of encouraging economic growth by reducing the tax burden on additional investments, the current tax code distorts capital flows, hurting productivity, job creation and our global competitiveness.

We have made great strides in the last few years. Tax law changes in 2001 and 2003 have helped flow-through businesses flourish and create jobs. These changes will help fuel future prosperity in Montana. Over 100,000 Montana small businesses, including a lot of farmers, will pay lower taxes this year. They will have more money to invest in growing their businesses and creating jobs.

Let me say again how glad I am to be here with Senator Baucus. We share the goals of a free, dynamic marketplace, where government does not pick economic winners or losers, and business men and women are able to make decisions based on what is best for their companies and their workers. The benefits of free trade and economic openness are as compelling in Montana as they are anywhere in the country.

Thank you. I look forward to hearing your questions and your insights on the Montana economy.