New York Fed Chair In 1945: ‘Taxes For Revenue Are Obsolete’

In 1943 Beardsley Ruml won his fight with President Franklin D. Roosevelt over withholding, current collection, and tax forgiveness. It wasn’t a rout; FDR managed to limit the amount of tax forgiveness that Congress granted to taxpayers. But lawmakers still agreed to forgive 75 percent of a full year’s tax liability. Ruml — treasurer of the R.H. Macy Co. and a prominent public intellectual — had reason to be pleased.

He also had reason to keep going. After his victory in the forgiveness fight, Ruml did not retire from the public arena. Indeed, he threw himself into broader debates about U.S. fiscal policy, including the very nature — and necessity — of federal taxation.

“Taxes for Revenue Are Obsolete,” Ruml declared in the headline of a January 1946 opinion article. Modern nation-states didn’t need taxes to fund operations — they had other tools at their disposal.

Ruml’s provocative declaration implied a broader question: If taxes weren’t necessary to fund government activities, why impose them at all? Ruml’s answer was simple: Taxes were instruments of social and economic reform. “Our Federal Government has final freedom from the money market in meeting its financial requirements,” he wrote. “Accordingly, the inevitable social and economic consequences of any and all taxes have now become the prime consideration in the imposition of taxes.”

Ruml’s argument was provocative — and more than a little surprising, coming from a prominent business leader who also happened to be chair of the Federal Reserve Bank of New York. Ruml seemed to be attacking the foundations of traditional public finance, not to mention the conservative policy agenda of the business community; fiscal responsibility, including a focus on balanced budgets, was something close to dogma among U.S. business leaders.

But Ruml’s apostasy was something of a ruse. He may well have been sincere when he argued that revenue constraints were imaginary. But that argument was also a sly tool for advancing one of the business community’s top policy priorities. “The corporation income tax,” Ruml declared, “is an evil tax and it should be abolished.”

Postwar Publication

Ruml’s article on revenue appeared in American Affairs, “a quarterly journal of thought and opinion” published by the National Industrial Conference Board. Founded in 1916, the board was “a spokesman for the so-called progressive wing of the business community,” as the Hagley Museum and Library noted in its description of the organization.

But “progressive” was a relative term, and it certainly wasn’t a synonym for liberal. The editors of American Affairs described the magazine as a forum for controversial ideas. “Its pages are intentionally open to views and ideas that provoke debate,” they wrote. But most contributions came from business leaders, as well as some business-adjacent intellectuals. Broadly speaking, these contributors offered up generally conservative, or at least traditional, views of public policy.

Still, the editors of American Affairs seemed genuinely eager to ruffle some feathers. Articles often reflected a contrarian bent, at least superficially. Usually, however, authors made their way to rather conventional policy recommendations.

Ruml’s article was a case in point. With a brash title and some heretical suggestions, Ruml donned the cloak of a radical. But he used his provocations to advance distinctly nonradical ends, including repeal of the corporate income tax.

Business and Government

Ruml began his piece with a broad discussion of government and business. Government granted private enterprise the freedom to operate, including “rulemaking” authority within its sphere. But government supervised and constrained this freedom, often using taxes as a regulatory tool. “The superior position of public government over private business is nowhere more clearly evident than in government’s power to tax business,” Ruml wrote. “Taxation is one of the limitations placed by government on the power of business to do what it pleases.”

Taxing business was not inherently wrong, Ruml emphasized. But neither was it necessarily wise. Any judgment about business taxes must be a practical one. Business should be taxed — or left untaxed — only when it served the public interest.

“The issues in the taxation of business are not moral issues, but are questions of practical effect,” Ruml explained. “What will get the best results? How should business be taxed so that business will make its greatest contribution to the common good?”

For Ruml, the question of business taxation was actually secondary to a more basic query: “If we are to understand the problems involved in the taxation of business, we must first ask: ‘Why does the government need to tax at all?’”

“The obvious answer,” Ruml suggested, was that taxes provided money to fund government operations. But the obvious answer was wrong. Governments had other ways of funding their activities, most notably borrowing. The recent experience of World War II demonstrated the viability of that option, even when conducted on a large scale. “If we look at the financial history of recent years it is apparent that nations have been able to pay their bills even though their tax revenues fell short of expenses,” Ruml wrote.

Freedom From Finance

Two developments in modern governance had made tax revenue a secondary concern, Ruml continued: the rise of central banking and the decline of the gold standard.

Years ago, governments that relied on loans were constrained by the willingness of financial markets to support that borrowing. “If a government persisted in borrowing heavily to cover its expenditures, interest rates would get higher and higher, and greater and greater inducements would have to be offered by the government to the lenders,” Ruml wrote. “These governments finally found that the only way they could maintain both their sovereign independence and their solvency was to tax heavily enough to meet a substantial part of their financial needs, and to be prepared — if placed under undue pressure — to tax to meet them all.”

State and local governments in the United States were still constrained by that revenue necessity. The federal government, however, faced no pressure from tightfisted lenders. “The United States is a national state which has a central banking system, the Federal Reserve System, and whose currency, for domestic purposes, is not convertible into any commodity,” Ruml argued. “It follows that our Federal Government has final freedom from the money market in meeting its financial requirements.”

If lenders couldn’t force taxes on the federal government, why impose them at all? Ruml’s answer was unconventional, if not exactly novel. “The inevitable social and economic consequences of any and all taxes have now become the prime consideration in the imposition of taxes,” he contended. “In general, it may be said that since all taxes have consequences of a social and economic character, the government should look to these consequences in formulating its tax policy.”

Specific Goals

Moving from the general to the slightly more specific, Ruml outlined four principal goals for modern fiscal policy. In recent years, he wrote, taxes had been used in four ways:

1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;

2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;

3. To express public policy in subsidizing or in penalizing various industries and economic groups;

4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.

The important debates in American fiscal policy were about these purposes, not the specific taxes used to advance them. And each of these purposes implied an underlying question:

Do we want a dollar with reasonably stable purchasing power over the years?

Do we want greater equality of wealth and of income than would result from economic forces working alone?

Do we want to subsidize certain industries and certain economic groups?

Do we want the beneficiaries of certain federal activities to be aware of what they cost?

“These questions are not tax questions,” Ruml insisted. Rather, they were “questions as to the kind of country we want and the kind of life we want to lead.” Taxes were a means to an end, and any particular tax program should be judged on how it served those ends.

With the experience of World War II close at hand, inflation loomed especially large in Ruml’s view of taxation. “By all odds, the most important single purpose to be served by the imposition of federal taxes is the maintenance of a dollar which has stable purchasing power over the years.” Certainly, price control had been a principal concern for tax policymakers during the war. And it was sure to remain a top priority as the United States tried to navigate the transition back to a peacetime economy.

To Ruml — and most other economic observers of the era — fiscal policy was an indispensable weapon in the battle against rising prices. “Without the use of federal taxation all other means of stabilization, such as monetary policy and price controls and subsidies, are unavailing,” he wrote. “All other means, in any case, must be integrated with federal tax policy if we are to have tomorrow a dollar which has a value near to what it has today.”

Redistribution, Regulation, and Social Welfare

In recent years, Ruml observed, government officials had used taxes to regulate inequality and the distribution of wealth. In practical terms, that meant imposing individual income taxes on wealthy individuals; estate and gift taxes also played an important role.

Ruml was eager to point out that income taxes also helped in the battle against inflation. But estate and gift taxes did not.

“The estate and gift taxes have little or no significance, as tax measures, for stabilizing the value of the dollar,” Ruml wrote. “Their purpose is the social purpose of preventing what otherwise would be high concentration of wealth and income at a few points.” As a result, he continued, they should be judged with that end in mind: “These taxes should be defended and attacked in terms of their effects on the character of American life, not as revenue measures.”

Taxes could also be used to subsidize particular industries or sectors, Ruml said. Tariffs were the best example of this function. But import duties had been shrinking for decades, especially in terms of their contribution to total revenue collections. What remained was simply a regulatory tool. “These taxes are nothing more than devices to provide subsidies to selected industries,” Ruml wrote. “Their social purpose is to provide a price floor above which a domestic industry can compete with goods which can be produced abroad and sold in this country more cheaply except for the tariff protection.”

Ruml’s final category of taxes comprised all levies designed to align burdens with benefits. Nowadays, federal highway taxes are probably the best example of those levies. But in the 1940s, before the advent of large-scale federal funding for highway construction, social welfare programs were the more obvious example. “The most conspicuous examples of such measures are the social security benefits, old-age and unemployment insurance,” Ruml wrote. “The social purposes of giving such benefits and of assessing specific taxes to meet the costs are obvious.”

The Bad Tax

Ruml’s ruminations on federal taxation were all prefatory. He devoted the second half of his article — and nearly all his energy — to an argument against corporate income taxes.

“Taxes on corporation profits have three principal consequences,” Ruml began, “all of them bad.” First, the incidence of the corporate tax was uncertain but also unhelpful and unfair. The levy was paid by almost everyone, he insisted, not just fat-cat owners of capital. Consumers paid it in the form of higher prices, workers paid it through lower wages, and shareholders paid it through lower investment returns. “No matter from which source it comes, or in what proportion, this tax is harmful to production, to purchasing power, and to investment,” he wrote.

Second, the corporate tax distorted “managerial judgment.” It prevented managers from making rational and productive decisions about business operations. “Sometimes, apparently senseless actions are fully warranted because of tax benefits,” Ruml explained. “The results of this tax thinking [are] to destroy the integrity of business judgment, and to set up a business structure and tradition which does not hang together in terms of the compulsion of inner economic or engineering efficiency.”

Third, the corporate levy imposed a form of double taxation. “The individual taxpayer is taxed once when his profit is earned by the corporation, and once again when he receives the profit as a dividend,” Ruml wrote. This was bad enough on its face since it reduced the incentive to invest. But it also worked a progressive injustice on shareholders. “Stockholders with small incomes bear as heavy a burden under the corporation income tax as do stockholders with large incomes,” he explained.

For Ruml, the upshot was obvious — and this time, the obvious answer was also correct. “Any one of these three bad effects of the corporation income tax would be enough to put it severely on the defensive,” he wrote. “The three effects, taken together, make an overwhelming case against this tax. The corporation income tax is an evil tax and it should be abolished.”

Ruml acknowledged that immediate repeal was untenable. Policymakers must first devise some method to prevent shareholders from using the corporate form as a shield: “The corporation income tax cannot be abolished until some method is found to keep the corporate form from being used as a refuge from the individual income tax and as a means of accumulating unneeded, uninvested surpluses.”

But repeal was still imperative. Revenue from the corporate tax was unimportant to a modern nation-state — just like revenue from every other tax. Blessed with a robust central bank and untethered from any sort of fixed monetary regime like the gold standard, the United States could afford to abolish any tax that didn’t serve the public interest.

And abolition of the corporate tax would be a boon for almost everyone, Ruml insisted. It would lower prices for consumers, raise wages for workers, and provide better returns for corporate stockholders. Repeal would also allow managers to make rational business decisions, rather than having their decisions distorted by tax considerations.

The only question pertinent to repeal was one of social utility. And the answer to that question was obvious. “It is clear from any point of view that the effects of the corporation income tax are bad effects,” Ruml concluded. “The public purposes to be served by taxation are not thereby well served.”

Ruml and Modern Monetary Theory

In recent years, champions of modern monetary theory (MMT) have looked to Ruml as a prophet of sorts. His insistence that revenue was unnecessary to fund modern governments seems familiar to MMT adherents, who are similarly dubious about the importance of funding government with tax revenues.

But at least one MMT champion has questioned Ruml’s relationship to MMT ideas. Ruml was no radical when it came to fiscal policy. While he framed his arguments in surprising and provocative terms, his policy preferences were entirely conventional, at least for a leader of the business community.

“He was basically lobbying for zero corporate taxation and he expressed rather orthodox views about fiscal policy at the time, which are very non-MMT in substance,” wrote Australian economist William Mitchell in 2021. To the extent that Ruml was questioning the importance of revenue, it was part of his larger plan to make budgetary room for corporate income tax repeal.