Taylor told the Birmingham Mail there will be more young talent coming through the ranks at Villa Park in years to come because O'Neill believes in players getting the chance to jump from the club's Academy to the first team if they are good enough.
But Taylor, who left Villa in 2003, says he is delighted O'Neill shares his vision and has put the improving young players back on track - as shown when Fabio Capello picked five Villa players for his first England squad.
"It was one of things I was proudest of when I came back to Villa in 2002," said Taylor, who is promoting the Grass Roots Football Live Show at the NEC from May 30-June 1.
"I wasn't happy with results and I can see why fans would never accept the argument that the youth set-up was healthy when the first team aren't winning.
"But now I feel that what I achieved was on the Academy side.
"I understand, though, Martin O'Neill has it up and running again and there is now a direct link with the younger players and the first team.
"That can only be good for the future of the club and maybe England, too.
"The Academy can be proud. I think it is vitally important young players can see a way through from the Academy, the youth team, the reserves, right the way into the first team.
"Or in Agbonlahor's case, the England team - and the Villa Academy deserve huge congratulations for that.
"When I was there, I kept in touch with who was coming through. I would, on the odd occasion, go and watch a game at Bodymoor on a Saturday morning.
"It showed how vital I thought it was there was a connection between the youngsters and the first-team manager.
"It's also good for supporters to identify with a young player if he is home-grown."