Shultz Says It’s Time to ‘Clean House Again’ With U.S. Tax Code

George P. Shultz, a former head of the U.S. Treasury and onetime secretary of state, called for the elimination of tax preferences to stimulate the economy and increase government revenue.

“It’s time to clean house again,” Shultz, who headed the State Department for President Ronald Reagan in the 1980s, said yesterday in an interview at Bloomberg headquarters in New York. “The 1986 tax act is sort of the unsung hero of the very good economic times we had for a long time. Of course, politics gums it all up again and preferences get put in.”

The Tax Reform Act of 1986 lowered some rates and equalized the treatment of capital gains and ordinary income. Congress has since raised the top income-tax rate to 35 percent and dropped the top capital-gains rate to 15 percent. Shultz, 90, said a simplification of the code would allow Congress to lower rates on a “revenue-neutral” basis, while economic expansion would boost tax receipts.

“You’ll get a gusher,” Shultz said. “If you get this kind of stimulative tax policy and other things into effect, there will be a response and revenue will come in.”

President Barack Obama called yesterday for $1.5 trillion in tax increases over the next decade to help trim the deficit. Obama’s plan, which mostly targets the wealthy, drew criticism from congressional Republicans including Representative Paul Ryan of Wisconsin, who called the approach “class warfare.” Shultz said rich people and large companies like General Electric Co. are the beneficiaries of a complicated tax system.

Photographer: Andrew Harrer/Bloomber

George Shultz, former U.S. treasury secretary and onetime secretary of state, speaks during an interview in New York. Close

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Photographer: Andrew Harrer/Bloomber

George Shultz, former U.S. treasury secretary and onetime secretary of state, speaks during an interview in New York.

‘Wealthy People’

“It’s wealthy people and the GEs of the world that know how to manipulate these preferences and get their tax rates down,” said Shultz, an economist and former dean of the University of Chicago’s business school. “The average Joe doesn’t have access to those lawyers.”

Andrew Williams, a spokesman for Fairfield, Connecticut- based GE, said the company favors tax reform and the elimination of loopholes.

“We would welcome the opportunity to focus on making things the world needs and not on complying with the Byzantine tax structure as it exists,” Williams said in an e-mailed statement.

Shultz said Congress should consider Obama’s proposal to eliminate the so-called carried-interest exemption, which allows hedge-fund managers and private-equity executives to count some forms of compensation as capital gains. Any revenue gained should be returned to taxpayers by cutting rates, Shultz said.

“Obama seems to want to do something to damage rich people,” Shultz said. “You don’t get gushers of revenue by raising tax rates. You get it through expansion.”

Buffett Rule

Warren Buffett, the 81-year-old chief executive officer of Berkshire Hathaway Inc. (BRK/A), argued this year for raising taxes for the “mega-rich” in the U.S. Obama’s plan to tap the wealthy, which the White House calls the Buffett rule, would require that taxpayers with incomes of $1 million or more pay at least the same percentage in taxes as middle-income Americans, Treasury Secretary Timothy F. Geithner said in a Bloomberg Television interview.

Shultz was secretary of state under Reagan from 1982 to 1989. He headed the Treasury Department from 1972 to 1974 in the administration of President Richard M. Nixon and was on the Council of Economic Advisers for President Dwight D. Eisenhower. Under Nixon, Shultz worked with Paul Volcker, who later as chairman of the Federal Reserve helped bring the U.S. out of the “stagflation,” or simultaneous high unemployment and high inflation, of the 1970s.

Burden of Debt

Shultz said the Fed erred in the first decade of this century by keeping interest rates too low. While the central bank’s purchases of Treasuries helped maintain low rates, inflation will eventually push up borrowing costs, Shultz said.

“Some secretary of the Treasury not too far from now is going to find that it’s easy for interest rates to quadruple, easy, from these low short-term levels,” Shultz said. “And what does that do to the burden of the debt? Staggering.”

“This is exactly how we got into stagflation,” said Shultz, chairman of the energy task force at Stanford University’s Hoover Institution.

Two-year Treasury yields slid 1 basis point to 0.15 percent yesterday after touching a record-low 0.1451 percent. That compares with an average yield of about 2.44 percent over the last decade.

To contact the reporters on this story: Andrew Frye in New York at afrye@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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