New York Fed Chairman: Stop Using Income Taxes for Federal Income

November 18th, 2012
in econ_news, syndication

EconintersectBeardsley Ruml was a director of the New York Federal Reserve Bank (1937–1947), and was its chairman from 1941 until 1946.  He served as an advisor to Herbert Hoover and FD Roosevelt.  Ruml was also a key participant in the Bretton Woods Conference (1944) which established the international monetary system.  But today he is probably best known (to those who know he even ever existed) as one of the economic thinkers who proposed that, for fiat money systems, taxation of income to fund government spending was inefficient and not necessary.

Beardsley-Ruml

Follow up:

From the archives of the von Mises Institute comes the January 1946 issue of "American Affairs" in which Ruml has an article entitled:  "Taxes for Revenue Are Obsolete."

Ruml was especially outspoken about the inequities of corporate income taxes, which was a primary focus of this paper:

Taxes on corporation profits have three principal consequences-all of them bad. Briefly, the three bad effects of the corporation income tax are:

1. The money which is taken from the corporation in taxes must come in one of three ways. It must come from the people, in the higher prices they pay for the things they buy; from the corporation's own employees in wages that are lower than they otherwise would be; or from the corporation's stockholders, in lower rate of return on their investment.  No matter from which source it comes, or in what proportion, this tax is harmful to production, to purchasing power, and to investment.

2. The tax on corporation profits is a distorting factor in managerial judgment, a factor which is prejudicial to clear engineering and economic analysis of what will be best for the production and distribution of things for use. And, the larger the tax, the greater the distortion.

3. The corporation income tax is the cause 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. This double taxation makes it more difficult to get people to invest their savings in business than if the profits of business were only taxed once. Furthermore, stockholders with small incomes bear as heavy a burden under the corporation income tax as do stockholders with large incomes.

What did Ruml think the justifiable purposes for income taxes might be?  Here is his summary:

Federal taxes can be made to serve four principal purposes of a social and economic character. These purposes are:

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.

In the recent past, we have used our federal tax program consciously for each of these purposes. In serving these purposes, the tax program is a means to an end. The purposes themselves are matters of basic national policy which should be established, in the first instance, independently of any national tax program.

Among the policy questions with which we have to deal are these:

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; they are questions as to the kind of country we want and the kind of life we want to lead. The tax program should be a means to an agreed end. The tax program should be devised as an instrument, and it should be judged by how well it serves its purpose.

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. Sometimes this purpose is stated as "the avoidance of inflation"; and without the use of federal taxation all other means of stabilization, such as monetary policy and price controls and subsidies, are unavailing. 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.

The war has taught the government, and the government has taught the people, that federal taxation has much to do with inflation and deflation, with the prices which have to be paid for the things that are bought and sold. If federal taxes are insufficient or of the wrong kind, the purchasing power in the hands of the public is likely to be greater than the output of goods and services with which this purchasing demand can be satisfied. If the demand becomes too great, the result will be a rise in prices, and there will be no proportionate increase in the quantity of things for sale. This will mean that the dollar is worth less than it was before-that is inflation.

On the other hand, if federal taxes are too heavy or are of the wrong kind, effective purchasing power in the hands of the public will be insufficient to take from the producers of goods and services all the things these producers would like to make. This will mean widespread unemployment.

The dollars the government spends become purchasing power in the hands of the people who have received them. The dollars the government takes by taxes cannot be spent by the people, and, therefore, these dollars can no longer be used to acquire the things which are available for sale. Taxation is, therefore, an instrument of the first importance in the administration of any fiscal and monetary policy.

Beardsley Ruml was also the architect of the personal income tax payroll withholding process implemented in 1943 at the height of World War II mobilization.  For this act Ken Coffman has called Ruml "one of the most evil and destructive 'gangsters' in American history."

John Lounsbury

Sources: Links embedded in the article.

Hat tip to Roger Erickson.









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1 comment

  1. roger erickson says :

    1 of the most evil and destructive 'gangsters' in US history?

    Or just a banker slow to adjust Situational Awareness?

    Sure seems like the latter.

    "Never ascribe to malice that which is adequately explained by incompetence."
    Napoleon Bonaparte





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