The Basics of Modern Money

Taxes for Revenue Are Obsolete (Pdf)

By Beardsley Ruml
Chairman of the Federal Reserve Bank of New York

(written in 1946!)

Mr. Ruml read this paper before the American Bar Association during the last year of the war. It attracted then less attention than it deserved and is even more timely now, with the tax structure undergoing change for peacetime. His thesis is that given (1) control of a central banking system and (2) an inconvertible currency, a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue. All taxation, therefore, should be regarded from the point of view of social and economic consequences. The paragraph that embodies this idea will be found italicized in the text. Mr. Ruml does not say precisely how in that case the government would pay its own bills. One may assume that it would either shave its expenses out of the proceeds of taxes levied for social and economic ends or print the money it needs. The point may be academic. The latter end of his paper is devoted to an argument against taxing corporation profits. — EDITOR.

Full text also here

You wonder what today's economists are talking and in particular those nitwits Fuest and Fratzscher from Germany.

Ruml also noted that:

    The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government. Two changes of the greatest consequence have occurred in the last twenty-five years which have substantially altered the position of the national state with respect to the financing of its current requirements.

    The first of these changes is the gaining of vast new experience in the management of central banks.

    The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold.

So, where the currency issued by the central bank “is not convertible into gold or into other commodity”, then Federal government “has final freedom from the money market in meeting its financial requirements.”

For Ruml, Federal taxes … serve four principle purposes of a social and economic character”:

 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 income …

 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.

So the government might impose taxes:

1. To control inflation.

2. To redistribute purchasing power from the rich to the poor (high income to low income).

3. To alter the allocation of resources away from undesirable ends – such as tobacco taxes.

4. To provide some hypothecated public transparency for major projects/programs.

So from a functional finance perspective, taxation must be designed to advance these purposes and the public discussion must be about the idea of public purpose and never about raising revenue.