Tax Talk
Question-and-answer session

The following questions were answered by U.S. Secretary of the Treasury Paul O'Neill at the New Millenium Luncheon, April 15, 2002.

Question 1: What is our policy on gold reserves and do we lend them out?

Are you testing my memory here? We've got, as I recall, about 80 billion dollars of gold reserves. In a way it's become a moot issue since we separated ourselves from our gold standard and floated our currency in the Nixon administration on August 15, 1971. Do we loan them out? No we don't; they're down there in Fort Knox and there's a little bit under the Federal Reserve in New York City, but no. It caused me to make a different kind of point about where the world is. It's interesting when you think back to where we were in 1971. It's such a short time ago, especially for those of us with gray hair. We were in an economy and we were still big and we were important but in a way we were still operating ourselves as though the rest of the world was someplace else. More and more today the world is so integrated that the idea of being able to peg your currency and defend it against all comers is just an undoable thing anymore. There are very few countries in the world that have tried to peg their currency to something else, including to someone else's currency. Because the world is so integrated it's impossible to defend a lack of productivity (I think is a right way to think about this). If you don't have productivity, you can't defend yourself. It's why I made such a big point in my prepared remarks about productivity. When I was in Europe last week—Berlin, Paris and the UK, they just marveled at what's going on in this economy. Their growth potential: Germany's is maybe 1.5 to 2% real growth, France is maybe just a little bit better, the UK's been doing fairly well and their employment rates are a lot better. But they just shake their heads when they see productivity growth. I've been trying to explain it to them; I don't think it's too much of a mystery. For me it's substantially a function of the fear that we went through in the early 1980's when lots of business people in the United States got frightened that we were really losing our way and decided to stop making excuses and start making our way in the world and insisting that we would be the best in the world. It's really a combination of bowing our necks and using ever better ideas that has made us the most productive and it's the reason why we don't need to worry about whether we've got gold in Fort Knox or not. We've got it in our people's brains.

Question 2: Mr. Secretary, thank you for being here. The United States Senate is debating now the energy policy for the U.S. Some of us in the energy business don't even think the Senate will actually vote out a bill. Do you think the Senate will vote out an energy bill and if they do what effect do you think it will have on the economy? What effect will it have on the United States?

The President is really strong about the need for the first time to have a full fledged energy policy in the United States. The Vice-President convened us and we worked together for a few months at the beginning of last year and then the President sent what I call the wrap-around energy policy to the Congress and at the end of the year the House passed something substantially like what the President has requested. We're waiting for the Senate to act just as you said. It's a very interesting thing to think back to twelve or thirteen months ago. Everyday news was whether California was going to have a brown out or a black out that day. We were reading stories about food in California going to waste because the refrigeration went out. Just think about it. It wasn't very long ago we were going to have three dollar a gallon gasoline and then we had to slow down the economy and there was more oil supply. California worked out some of its transmission problems—enough to get by. Energy disappeared from the conversation. Think about it. I keep thinking about the Alaskan reserve which the President said he thinks we should develop and explore as an insurance policy. Do you know how long that conversation has been going on? It's been going on since 1974 and there is enough oil there that if it were available, it could replace the Iraqi flow of oil for thirty years, if we had to do that. The President has said we need to stand on the potential of deploying more nuclear energy. The President said we have to do more about conservation and we need a legislated policy so that we can do this in a concerted way. I guess to the end comment about your question, one of the things perplexing about our system of government is it's hard to get our government to act in an anticipatory way. So we don't; if we don't have a crisis of the moment it's hard to get a topic on the agenda and keep it there. Now, you can see how fast we can act when we have a crisis of the moment. The Congress acted almost immediately in the wake of September 11th to do some things that we needed to do right away. So, it's not that we don't know how to do it, but again, if we're going to have this, the President is out there, he's talking about it. The Vice-President's out there talking about it. The rest of us are talking about Spence Abraham whose principal responsibility is to be out there talking about it. But, we need an up going from the people saying we need to take some action. "Please Representatives and Senators, please take some action, because we know it's the right thing to do. We need your help." We need for you to be telling your great representative here in Grand Rapids that we need some action. They've acted in the House. When it, hopefully, comes back from the Senate we can do something quickly. That would be great. I'd make a general comment. I, and this is not gratuitous, the House has responded in a very fulsome way to almost every priority the President has put on their table. We've had a difficult time getting things through the Senate.

Question 3: Mr. Secretary, you spoke of a simplified tax code which I'm agreeing with. What ideas do you have? Do you favor a flat tax, or if you don't favor a flat tax, what ideas do you have to reduce the tax code and the burden on the American people?

Well, let me say again, today we're releasing the first of the series of papers that go directly at this question of simplification. It's working from within the four-corner boundaries of the tax code. But it doesn't really go to the heart of your question about a major reform idea. You know, you're going to get me in trouble, do you know that?

I really am one who believes that our society should reach for the ideal in everything we do. When I look at the 125 billion dollars that we're imposing on our society that's consuming the intelligence and the effort of some supremely, superbly well-trained people, it doesn't add value. It's a big government make work project. I'm sorry, but it is. You can't eat it, you can't wear it, you can't drive it. It's not to say that all services are bad, but these are not particularly useful.

When I think about what is the ideal case, taxes are fair. That means people in the same circumstance pay the same amount. In my ideal world people who have more, pay more. In my ideal world, it's easy to understand, it's painless, the instructions are a couple of pages long, and there's no ambiguity about what you owe. But, in that kind of a system, there are no deductions, there are no tax credits, there is none of that stuff we have come to know and love. It's a very interesting thing when you say to people, "This is what I'd like to have." Everybody says yes. And then they say, "But don't take away my home interest deduction" and "Don't take away my tax credit and don't take away the deduction I can make for sending my kids to school and don't take away my medical deduction." By the time you get through listening to everybody, you have 9,500 pages. And it's all indecipherable. So, for me, the ideal is, to reach for the stars and include everything in this subject.

But we need to have a coalition, and people out there who say, "Okay, I've had enough of this other way." And we need to do it. I'll tell you why I think this is important in a broader economic sense. At the moment we're riding on top of the world because we have enormous productivity in our private sector. If you look at the productivity that we could have in our public sector, that we need to have in our public sector, this is an example of a tax on society that has no value.

I'll give you a different example. I want to tell you this example because it illustrates an important point about the productivity potential of the government. When I was at Alcoa, where I was for 13 years, I worked on everything and I believed that every person should have a day where they were treated with dignity and respect and, and they were given what they needed to make a contribution that gave meaning to their life and that somebody recognized them for doing it. It wasn't just for a certain group of people, for high or low, it was for every person in the place. Some of the people in the place, obviously, were doing financial things.

So, one day I was thinking about how can we do something better to illustrate this principle in finance and I began thinking, it takes us 12 days to close the books in this organization, with 350 locations in 36 countries. It seems like an awful long time, I thought; maybe we can do it a lot faster than that. So I challenged the organization to do an analysis and figure out if we did it perfectly, if we didn't have anything except creative value at the time we rolled up the numbers every month, how long would it take us? The answer was two-and-a-half or three days. So I said, "We should do that." We began examining why we didn't do it now. It's because the process we had were old computers, incompatible computers, systems not friendly to human beings, designed by accountants.

Accounting imposed requirement for people to do things that didn't make any sense, we collected a lot of data and we didn't know why we were doing it. For when we really asked the question we got to three days.

In fact they're at two-and-a-half days at Alcoa now and it's all perfect and they're the first company in the world of any size to really report their earnings every quarter because they can do it in 2.5 days.

So when I came to the Treasury I said, "How long does it take us to close the books? "Five months." And I said, "Doesn't seem right to me. Here's the standard: we can do this in two-and-a-half days." In couple of weeks I got this four-to-five page memo that says "OK, we checked with Alcoa and we understand what you did there, and yes we're going to do it here and we'll set a target day for getting it done in 2004." I said, "That doesn't seem really good to me. How about June 1, 2002?"

You know what? For the last couple of months we've been closing the books at the Treasury in three days.

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