The United States needs a new tax system that both increases revenues and makes the country more competitive, says former Treasury Secretary Hank Paulson.

"There's nothing that frustrates me more than the tax debate, because I've studied the tax system. And there's no doubt we need more tax revenues. Of course we need more tax revenues, they're 15 percent of GDP now, they've averaged more than 18 percent for 40 years," Paulson tells CNBC.

The Obama administration has proposed tax hikes on the wealthy in order to boost revenues, while critics says such a policy divides the country whereas instead, the president should focus more on cutting excessive government spending.
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Editor’s Note: The IRS' Worst Nightmare' -- How to Pay Zero Taxes.

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More sweeping reform is needed, Paulson says.

"The issue shouldn't be what do we do with this rate or that rate. The question should be, what form of taxes will give us the revenues we need and let us be competitive and create jobs and give us economic growth," Paulson says.

"That's what we need, and no one would argue that the current system does it. We need a new system."

A new streamlined system is needed.

"I've been for a system where we would eliminate the deductions and all the distortions and the special spending programs that are part of the tax code and lower the rates and have something that will let us be competitive in today's world."

The Obama administration's budget proposal calls for tax hikes on wealthier Americans in order to finance job creation and infrastructure development projects.

Analysts dismissed the proposal.

"This is all politics; there is no fundamental strategy. This does not answer any of the warnings we saw from S&P," says William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts, according to Reuters.

Standard & Poor's downgraded the U.S. in 2011, stripping the country of its AAA rating due political inability to tackle narrowing the country's gaping deficits.