This is a rush transcript from "Your World with Neil Cavuto," July 25, 2007. This copy may not be in its final form and may be updated.

NEIL CAVUTO, HOST: All right, another alert for you. You, of course, heard the terror threat.

Now to the man trying to stop the people financing that threat, Treasury Secretary Hank Paulson, telling me earlier today: Be on guard.

(BEGIN VIDEOTAPE)

HENRY PAULSON, U.S. TREASURY SECRETARY: The terrorist threat is very real and we need to be vigilant.

And the — we have a role to play in safeguarding our financial system. So you hear me talk a lot about safety and soundness, but I also talk about safety, soundness and security, because, by designating terrorists and those who work with terrorists, we're able to make a difference in isolating them from the financial community, number one, and, number two, we can gain very valuable insights into the terrorist network through our financial intelligence.

CAVUTO: But the problem with that, right, Secretary, is that it doesn't have to be a lot of money, right? I mean, if some of these stories are right, I mean, they're hiding weapons in blocks of cheese and stuff like that. That isn't a lot of money.

So how do you police that?

PAULSON: Well, let me say this, Neil.

There's no single path that's a knockout punch. But we have to vigilant on a lot of fronts. And it is very hard for terrorists to move any kind of meaningful amounts of money without going through the financial system. It's very difficult for an organization as big as Al Qaeda to sustain itself without financing, without being able to move money. And it's even cumbersome moving small amounts of money without going through a financial system.

CAVUTO: You know what amazes me — and then I promise we will get off this subject, Secretary — is that Al Qaeda is still fixated on planes.

PAULSON: Well, I have got to tell you, Neil, we need to, again, be vigilant. And one area of vigilance is keeping our financial system, our banking system free from abuse by terrorists.

CAVUTO: All right. Let's talk a little bit about a different kind of problem for this country that does terrorize some financial analysts, and that is the fact that the U.S. is losing its premier financial status, mainly because of onerous taxes, rules, regulations — the latter of which we could address at another point.

But you're more concerned that we have become a hostile place? Or how would you describe it?

PAULSON: Well, here's how I would describe it, Neil. Let's look at taxes, because the lens I'm looking through when I look at business taxation in this country is competitiveness.

And if you go back to the late '70s, early '80s, we were a high-tax country in terms of the way we treated business. Then we had a series of reforms driven by Ronald Reagan in 1986, and we were a relatively low-tax country.

We now have become a high-tax country. We have a high level of taxes and great complexity relative to those around the world. And others are continuing to lower their tax rates.

You know, people have historically thought of Europe as having high business tax rates. That's not true anymore relative to the U.S. And they're continuing to lower them.

So, again, what I am focused on is jobs, high-quality jobs, competitiveness and prosperity of the American worker, and I think that's really the right way to look at the business tax issue.

CAVUTO: But, Mr. Secretary, I talk to a lot of established sort of brick-and-mortar CEOs who say, "Why do I have to pay a higher tax rate than those hedge fund guys who have to pay at the 15 percent capital gains rate and I have to pay at the 35 percent rate?"

So, the move afoot in Congress to raise taxes on those hedge fund individuals and funds, some in corporate America actually welcome.

What do you think of that?

PAULSON: You have different views in different places in corporate America. But, again, what we're doing, Neil, is — I want to avoid responding to the headline of the moment, one industry singling out an industry.

I think what we really need to do is take a step back and, again, through the lens of competitiveness, say, do we have the right tax system for this century in order to keep this country prosperous and growing and create jobs in this country?

And I don't believe it makes sense to put in a special provision aimed at one industry today.

(CROSSTALK)

CAVUTO: All right. So you wouldn't be moving on hedge funds. But I guess more to the point of what Democrats are considering, sir, and that is maybe tinkering with the president's tax rates and breaks for upper income, maybe capital gains. We have seen that out of some of the prominent Democratic presidential candidates.

Are you saying that they are going to hurt the financial markets if they get their way?

PAULSON: Well, let's, again, take a step back and let's look at the top bracket, the 35 percent individual bracket.

You know, more than half the filers there are really small business. These are flow-through individual filers for business. And so I believe that when you take a look at the president's tax relief in 2001, lowering the brackets across the board, and then you look at the reform in 2003, where we reduced the taxes on capital and on investment, those were very important to our economic success.

My own belief is when it comes to investment, investment is critical to creating more jobs and better quality jobs and R&D. And when you tax something more, you get less of it.

So the question we're really asking is, for any given level of revenues that we're going to raise through taxing business, what's the system that will give us the most new jobs and the highest quality jobs? And so, again, taxes are — and I think everybody agrees — taxes are a necessary evil, but we need them. We need to raise revenue.

So the question is, given that we're going to have taxes and we're going to raise revenue, how do we have a tax system that is going to make us as competitive as possible and create as many new jobs as possible for the rest of the century?

CAVUTO: You're widely admired in both Democrat and Republican circles, Mr. Secretary, and some have actually suggested to me, "You know, Hank Paulson is a guy we would like to see stay on in a Democrat administration." Would you ever consider that?

PAULSON: Neil, well, listen, when I came down here a year ago, people said, "you have only got two-and-a-half years." I said, "Two-and-a-half years seems like a long time to me. I'm going to go full-speed for two- and-a-half years. I'm looking forward to it. I have got a job to do, and then 18 months from now, I'm going to be going on to the next phase of my career."

CAVUTO: And if a Democratic president — if it were to happen, were to ask you, "Secretary, we have done a great job, we want you to stay on, we like your ideas," would you stay?

PAULSON: Well, I would love it if anybody likes my ideas.

(LAUGHTER)

PAULSON: But, again — and I don't think quite as many people like my ideas as you claim do. But, anyway, I'm working hard. I'm going to my best job I can here to work on a bipartisan basis to solve as many problems as we can, or to work towards solutions of as many problems, for two-and-a- half years, and then I'm going to go on from there.

CAVUTO: OK, Secretary, if you don't mind my indulging one more question on what — and it concerns the problems that seem to be widening in the subprime mortgage arena, perhaps beyond now to the not-so-sub arena, that this could be a widening issue and a widening problem. What do you think?

PAULSON: Well, Neil, let's start with the global economy — which is very healthy, very strong — the U.S. economy, which is strong. we have got strong labor markets creating good jobs, great growth outside of the country, exports growing, business investment picking up.

Now, against that backdrop we have had a major correction in the housing market. And it's going to take awhile to work through that transition.

CAVUTO: What's awhile? What's awhile?

(CROSSTALK)

PAULSON: It's going to — I'm not going to predict, but it's going to take awhile. It's going to take some time because — and so then when you get to the subprime market or the mortgage market, it's going to take longer. It's going to take a longer time as mortgages reset.

So, what we have never said is — never said there's not going to be problems, there's not going to be dislocations.

But, getting back to your bigger question, it will take a longer time to work through the subprime mortgage issues. I see those as being largely contained, not posing serious risks to the overall economy, which is very diverse. But that's going to be a natural fallout of the housing correction we have had, is mortgage rates reset over time.

(END VIDEOTAPE)

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