Federal Taxes Don’t Fund the Government: We’ve Known This Since 1946

The Shocking Truth a Federal Reserve Chairman Told America (And Why It Took 80 Years to Rediscover)

In 1946, while America was still celebrating victory in World War II, a prominent figure in American finance stood before the American Bar Association and made a statement so radical it should have transformed economic policy forever.

“Taxes for revenue are obsolete.”

The man who said this wasn’t some fringe academic or political agitator. He was Beardsley Ruml, Chairman of the Federal Reserve Bank of New York, one of the most powerful positions in American finance. He was also chairman of R.H. Macy & Co., a participant in the Bretton Woods Conference that established the postwar international monetary system, and the architect of the modern tax withholding system we still use today.

In January 1946, in an article published in American Affairs journal, he told America a truth that should have changed everything: the federal government doesn’t need tax revenue to fund its spending.

Ruml was careful to distinguish the federal government from state and local governments. States and cities genuinely need tax revenue or borrowing to fund their operations because they don’t issue their own currency. But the federal government, he explained, operates under entirely different rules. It creates the currency itself.

So why are you hearing about this for the first time? And why did it take the emergence of Modern Monetary Theory nearly 80 years later for us to rediscover what Ruml explained in 1946?

Who Was Beardsley Ruml?

To understand why Ruml’s statement matters, you need to understand who he was. This wasn’t some radical outsider. This was the establishment speaking.

Beardsley Ruml (1894-1960) was a statistician, economist, and businessman who moved in the highest circles of American power. After earning his PhD from the University of Chicago in 1917, he became a pioneer in intelligence testing for the U.S. Army. He later directed the fellowship program of the Rockefeller Foundation, became dean of Social Sciences at the University of Chicago, and rose to become an executive and eventually chairman of R.H. Macy & Co. in 1945. He served as a director of the New York Federal Reserve Bank from 1937 to 1947, and as its chairman from 1941 to 1946.

During World War II, Ruml proposed something that would change American life forever: the withholding tax system. Before 1943, Americans paid their income taxes annually in one lump sum. Ruml convinced Congress to adopt “pay-as-you-go” withholding, where employers deduct taxes from each paycheck. This system, which we still use today, made income taxation far more efficient. People barely notice money they never see.

But Ruml’s most important contribution wasn’t administrative. It was intellectual. It came in his 1945 speech to the American Bar Association, published in January 1946.

What Ruml Actually Said

In his address to the American Bar Association, later published as “Taxes for Revenue Are Obsolete,” Ruml started with a seemingly simple question: “Why does the government need to tax at all?”

The obvious answer, he noted, is that “taxes provide the revenue which the government needs in order to pay its bills.”

But then Ruml dropped his bombshell. He explained that this answer, while intuitive, was fundamentally wrong for the federal government with two specific characteristics:

1. Control of a central banking system (like the Federal Reserve)
2. An inconvertible currency (money not tied to gold or any other commodity)

Here’s Ruml’s key passage, which the journal editors considered so important they italicized it:

“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. It follows that our Federal Government has final freedom from the money market in meeting its financial requirements. Accordingly, the inevitable social and economic consequences of any and all taxes have now become the prime consideration in the imposition of taxes.”

In other words: The federal government doesn’t need to collect taxes before it can spend. It can simply create the money it needs.

Ruml was explicit about the distinction: “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.” State and local governments don’t create currency. They genuinely need tax revenue or borrowing to spend. The federal government faces no such constraint.

This might sound insane. But Ruml was describing the actual mechanics of how sovereign currency systems work after leaving the gold standard, a process that had begun in 1933 when FDR took the U.S. off the domestic gold standard, and would be completed in 1971 when Nixon ended international gold convertibility.

What Ruml understood (and what we’ve spent decades forgetting) is that our money system fundamentally changed. Before, dollars were like gold coins, scarce objects that got moved around. After 1971, the federal government creates and manages dollars to coordinate economic activity. Money became more like a measurement system than a commodity. But our entire political discourse still operates as if we’re on the gold standard.

If Not for Revenue, Then Why Tax at All?

If the federal government doesn’t need tax revenue to spend, why have federal taxes at all?

Ruml identified four crucial functions of taxation:

1. To stabilize the purchasing power of the dollar (controlling inflation)

This is the primary function. Taxation removes money from the economy, preventing too much money from chasing too few goods. When the government spends money into existence, it needs a mechanism to remove money to prevent inflation. That mechanism is taxation.

2. To express public policy in the distribution of wealth and income

Progressive taxation, estate taxes, and other policies can reduce inequality and shape the distribution of economic resources according to democratic values.

3. To subsidize or penalize various industries and economic groups

Tax incentives and penalties can encourage or discourage specific economic behaviors: renewable energy, tobacco use, real estate investment, and so on.

4. To isolate and assess directly the costs of certain benefits

Sometimes linking taxes to specific benefits (like highway taxes funding roads) helps create public accountability and appropriate usage.

Notice what’s absent from this list: raising revenue to fund government operations.

As Ruml put it: “The public purpose which is served should never be obscured in a tax program under the mask of raising revenue.”

The Two Changes That Made This Possible

Ruml was careful to explain why this represented a fundamental shift. Two historical developments had transformed government finance:

First, the rise of central banking. Before central banks, governments that wanted to borrow faced the constraints of financial markets. If they borrowed too heavily, interest rates would rise, making further borrowing prohibitively expensive. This forced governments to rely primarily on tax revenue.

Second, the abandonment of the gold standard. When currency was convertible into gold, governments faced real resource constraints. They needed gold reserves to back their currency. But with an inconvertible fiat currency, that constraint disappeared.

This shift fundamentally transformed what government debt means. Before 1971, Treasury bonds were IOUs backed by gold the government might not have. After 1971, Treasury bonds became IOUs payable in dollars that only the government can create. The federal government can always pay its debts, yet our entire political discourse still operates as if we’re living under the gold standard.

Together, these changes meant that the federal government achieved “final freedom from the money market.” It could no longer be held hostage by bond vigilantes or gold reserves.

State and local governments, Ruml carefully noted, still faced these constraints because they don’t issue their own currency. They genuinely do need tax revenue or borrowing to fund their operations. But the federal government operates under entirely different rules.

Why This Matters: The Real Sequence of Money

Here’s the part that breaks most people’s brains: The federal government must spend money into existence before anyone can pay taxes.

Think about it. Where do dollars come from originally? They don’t grow on trees. They’re not mined from the ground. Private individuals and businesses can’t create U.S. dollars. That’s counterfeiting.

Dollars can only come into existence through:

1. Federal government spending (the government credits bank accounts)
2. Federal Reserve lending through the banking system
3. Bank lending (which creates deposit money, but this still requires government-issued reserves in the banking system)

This is how the system actually works, not theory. When Congress appropriates funds, the Treasury instructs the Federal Reserve to credit bank accounts. New money comes into existence through keystroke entries. This is the documented operational sequence.

This means the logical sequence is:

1. Federal government spends money into existence
2. Money circulates through the economy
3. Federal government collects some back through taxation

The conventional wisdom has it backwards. We think of it as:

1. Government collects taxes
2. Government spends tax revenue

But that isn’t how it works at the fundamental level, because the money wouldn’t exist to tax if the government hadn’t created it in the first place.

As Ruml understood, taxation doesn’t fund federal spending. Taxation destroys money that the government already spent into existence, helping to control inflation and achieve the other policy objectives he identified.

The Controversy: What Ruml Really Wanted

While Ruml’s analysis of how government finance works was largely correct (at least for the post-gold-standard era), his political agenda was less noble.

The bulk of his 1946 article wasn’t actually about the fundamental nature of taxation. It was a lobbying effort to eliminate the corporate income tax.

Ruml argued that since government doesn’t need tax revenue, and since corporate taxes ultimately get passed on to consumers anyway, we should abolish them. This was, not coincidentally, exactly what the business community wanted.

Some Modern Monetary Theory economists, like Professor Bill Mitchell, have pointed out that if you read Ruml’s complete work carefully, he wasn’t really a proto-MMT thinker. He still believed government debt needed to be paid back with future taxes. He was using the “taxes are obsolete” argument strategically to benefit his corporate allies.

You can acknowledge Ruml’s political agenda while still recognizing that his core insight about how sovereign currency systems work was correct.

A stopped clock is right twice a day. Ruml may have been pushing a pro-business agenda, but in making his argument, he accurately described the mechanics of modern fiat currency that most economists and policymakers still refuse to acknowledge today.

The Lost Decades: Why We Forgot

If a Federal Reserve chairman explained all this in 1946, why did we forget?

Several factors contributed to this collective amnesia:

The Bretton Woods System (1944-1971) maintained a modified gold standard for international transactions, obscuring the full implications of fiat currency. The U.S. dollar was convertible to gold for foreign governments, creating some constraint on money creation, though these constraints largely applied to international, not domestic, policy. Nixon ended convertibility not as some reckless experiment but because we faced the prospect of literally running out of gold reserves as countries like France exercised their right to convert dollars to gold. Since 1971, we’ve operated in what economists call a “soft money” or “fiat currency” system, fundamentally different from the “hard money” gold standard. But most Americans still apply hard money logic to soft money reality.

The Cold War political climate made any economic ideas that questioned conventional wisdom about government finance seem dangerously radical or “socialist.” Ruml’s insights were particularly easy to ignore because they came wrapped in a pro-corporate agenda that business didn’t actually need explained to pursue their interests.

The rise of monetarism and neoliberalism in the 1970s and 1980s pushed economics in exactly the opposite direction. Economists like Milton Friedman (ironically, someone who actually understood that governments create money) focused on constraining government rather than explaining its actual capabilities. As I document in “50 Years of Economic Myths Have Delivered Americans Into Technofeudalism,” this wasn’t accidental. For fifty years, powerful interests have systematically conditioned Americans to accept artificial limits on our collective power. Politicians from both parties, from Reagan’s “fiscal conservatism” through Clinton’s “Third Way” to Obama’s deficit reduction, used the same economic myths to justify policies that concentrated wealth upward.

The household budget metaphor proved incredibly sticky. Politicians and media found it easier to explain government finance using analogies to household budgets, even though the analogy is fundamentally misleading. Governments that issue their own currency are nothing like households. This wasn’t innocent simplification. It was systematic miseducation designed to prevent us from recognizing the economic tools that could transform our collective political power.

Professional incentives in economics favored models that treated government finance as similar to private finance. Grants, positions, and influence flowed to economists who reinforced conventional wisdom, not those who challenged it. This conditioning ran so deep it captured even universities, with academic economics continuing to teach these myths despite their failure to meet basic scientific standards.

Most importantly, powerful interests benefited from the confusion. If the public believes the government “can’t afford” social programs, healthcare, education, or infrastructure, then demanding these programs seems irresponsible. But if people understood that the constraint isn’t money but real resources (labor, materials, technology) the political debate would shift dramatically.

Economic insecurity makes us politically exploitable. When we’re economically fragile, we can’t resist bad deals. We accept worse conditions, which makes us more fragile and even more exploitable. It’s a downward spiral. Meanwhile, economic security creates political independence. It gives us the foundation to take risks, reject exploitation, and build genuine self-determination.

This misunderstanding has geopolitical consequences. China builds high-speed rail networks and green energy infrastructure. European nations invest heavily in education and healthcare. Meanwhile, America debates whether we can “afford” to fix crumbling bridges or address climate change. Other countries have figured out these monetary realities while America stagnates in debt panic.

The Rediscovery: Modern Monetary Theory

It would take decades for economists to rediscover and systematize what Ruml had observed in 1946.

The development of Modern Monetary Theory began in the 1990s, primarily through the work of economists Warren Mosler, L. Randall Wray, Bill Mitchell, Stephanie Kelton, and others. They built on earlier foundations:

• Georg Friedrich Knapp’s Chartalism (1905): The state theory of money, arguing that money derives its value from government acceptance, not from precious metals
• Abba Lerner’s Functional Finance (1943-1947): The idea that government budgets should be judged by their economic effects, not by arbitrary rules about deficits
• Alfred Mitchell-Innes’s Credit Theory of Money (1913-1914): The understanding that money is fundamentally about credit relationships, not commodity exchange
• Hyman Minsky’s financial instability hypothesis: Understanding how bank credit and money creation work in modern economies

These theoretical foundations existed in the economics literature, but they remained marginalized. MMT synthesized them into a coherent framework for understanding how modern monetary systems actually operate.

The key insight (the same one Ruml had articulated in 1946) is that currency-issuing governments face no financial constraints, only real resource constraints.

The government cannot “run out” of money in any meaningful sense. It can always create more dollars. The relevant question is whether creating more dollars will cause inflation by trying to purchase more real resources (goods, services, labor) than the economy can produce.

Why This Changes Everything

Understanding that federal taxes don’t fund federal spending transforms every major political debate:

On Social Security and Medicare: These programs cannot “go bankrupt” in any meaningful sense. The federal government can always make the payments. The real question is whether the real resources will exist to provide the goods and services (medical care, nursing homes, and more) that seniors need. That’s a question about healthcare capacity and real economic productivity, not about “trust fund” accounting.

On the national debt: The so-called national debt isn’t really debt in the household sense. It’s mostly just the accounting record of dollars the federal government spent but hasn’t yet taxed back. Most of it represents the private sector’s savings held in Treasury securities. “Paying off” the national debt would mean destroying a large portion of private sector savings.

Treasury bonds aren’t debts the government owes. They’re investment products the government creates. They provide safe assets for the financial system, create a foundation for credit markets, and represent private sector wealth. Every dollar of government debt is a dollar of private savings. This confusion between outdated gold-standard thinking and modern monetary reality has led Americans to support policies that actively harm them, as I explore in Why Monetary Systems Matter.

The political consequences of misunderstanding this are severe. “Fiscal responsibility” rhetoric enables systematic wealth transfer. It cuts programs that provide economic independence while preserving systems that create economic dependence. Meanwhile, technical policies like depreciation rules systematically transfer wealth from working people to asset owners through seemingly neutral tax code provisions that most Americans never learn about.

On deficit spending: Deficits aren’t inherently good or bad. What matters is whether the spending drives inflation (meaning we’re hitting real resource constraints) or achieves important public purposes. A deficit during a recession with high unemployment is completely different from a deficit when the economy is at full capacity.

Much of the growth in the national debt comes not from new spending programs but from a peculiar budgeting practice. When bonds mature, Congress only budgets for the interest payments, not the principal. This forces the principal to be “rolled over” into new debt, making the total debt grow. This is a deliberate choice, not an economic necessity. I explore this mechanism in detail in The U.S. National Debt is Caused by UNDERSPENDING.

On “how will you pay for it?”: This question, asked of every progressive policy proposal, fundamentally misunderstands government finance. The federal government will pay for it the same way it pays for everything: by spending money into existence. The real questions are: (1) Are the real resources available? (2) Will it cause inflation? (3) Does it serve important public purposes?

This mismatch between old thinking and new reality prevents us from using our full economic potential. Money is never the constraint. The constraints are real resources and political will. While we debate imaginary debt crises, we miss real opportunities like infrastructure investments, educational improvements, climate adaptation, and healthcare efficiency. The real crisis is wasting our potential fighting imaginary constraints.

On inflation: MMT doesn’t claim governments can spend unlimited amounts without consequence. It explicitly acknowledges inflation as the key constraint. But it shifts the debate from “can we afford it?” to “will it cause inflation?” That’s a better, more empirically answerable question.

On wealth concentration: From 1979 to 2019, productivity grew 60% while median worker compensation grew only 16%. Workers produce more value but capture less of it. This wasn’t caused by monetary factors but by policy choices justified through outdated economic thinking. We “can’t afford” minimum wage increases. We must keep taxes low to “encourage investment.” We must accept inequality to maintain “fiscal responsibility.” These wealth transfers hide behind seemingly neutral economic rules that most people don’t understand. For instance, as I detail in How Corporate-Friendly Accounting Rules Create a $30 Trillion Transfer, even technical accounting structures systematically channel wealth from working families to corporate executives and shareholders.

The Politics of Economic Understanding

There’s a reason this knowledge has been suppressed, ignored, and forgotten for 80 years. Understanding how government finance actually works is politically explosive.

If citizens understood that federal spending doesn’t require “finding the money” in some pre-existing pot, they might demand better schools, healthcare, infrastructure, and social programs. They might question why we “can’t afford” these things but can always seem to afford tax cuts, bank bailouts, and military budgets.

The mythology that government finance works like household finance serves a powerful political function: it constrains the political imagination. It makes transformative public programs seem fiscally irresponsible before we even debate whether they’re good policy.

The persistence of these myths despite their failures reveals their true purpose. Economic theories that consistently make false predictions continue to dominate policy. Every sustained surplus in American history preceded recession (1920s to Great Depression, 1990s to dot-com crash). Politicians from both parties praised these surpluses as responsible governance, then blamed “external factors” when the inevitable crashes occurred.

These theories fail basic tests. Japan’s massive money creation produced minimal inflation. Countries imposing austerity saw deflation and collapse. Yet the theories persist. As I explore in “Economics is not a Science,” mainstream economics functions more like ideology than science. It’s shaped by corporate capture of academia, professional incentives that reward orthodoxy, and institutional structures that marginalize alternative approaches regardless of their predictive success. The field treats failed theories as settled science because they serve political purposes, not because they explain reality.

Historical examples prove the power of this understanding. After World War II, the GI Bill and Federal Housing Administration took homeownership rates from 44% in 1940 to 62% by 1960. The government created money for no-down-payment loans through these programs. This wasn’t “fiscal irresponsibility.” It was using monetary capacity to build the most prosperous middle class in history. Younger generations can own homes too if we choose policies that make homeownership achievable.

This is why Beardsley Ruml’s 1946 insight was so dangerous. And why it had to be forgotten.

What We Can Learn from Ruml Today

Ruml’s analysis wasn’t perfect. He wasn’t a full MMT thinker. He had his own biases and agenda. But he understood something crucial that we’ve spent 80 years trying to forget:

Currency-issuing governments like the federal government are not financially constrained in the way households, businesses, or state and local governments are constrained.

This doesn’t mean they face no constraints. Real resource constraints matter immensely. Inflation matters. The productive capacity of the economy matters. But these are fundamentally different questions from “where will we find the money?”

Understanding our actual monetary system means asking different questions. Instead of “how will we pay for it?” we ask “do we have the resources?” Instead of “is the debt too high?” we ask “is wealth concentrating too much?” Instead of “are we printing too much?” we ask “are we mobilizing capacity effectively?”

The constraints are real (inflation, resource limitations, productive capacity) but they’re different from the imaginary constraints of “running out of money” or “unsustainable debt.” Understanding these real versus imaginary constraints changes everything. Breaking free from outdated thinking isn’t just about getting the economics right. It’s about reclaiming our democratic capacity to build the future we want.

We don’t need to wonder whether Ruml would have supported modern progressive policies. He probably wouldn’t have. He was a corporate executive advocating for eliminating business taxes. What matters is that his technical analysis was largely correct, and we’ve been pretending otherwise ever since.

The rediscovery of these insights through Modern Monetary Theory represents one of the most important intellectual developments in economics in recent decades. Not because MMT invented new ideas, but because it recovered, systematized, and explained old truths that were always hiding in plain sight.

When a Federal Reserve chairman tells you that taxes for revenue are obsolete, perhaps we should have listened. It’s taken us 80 years to begin relearning what Ruml explained in 1946.

How many more decades will we waste before we let this knowledge transform policy? The real question isn’t whether we can afford to invest in prosperity for working families. It’s whether we can afford another forty years of artificial scarcity based on imaginary constraints while real wealth continues concentrating among those who understand how the system actually works.

The path forward requires collective economic literacy. Understanding how economic systems actually work is the foundation of political independence. When enough of us understand how economic myths function as weapons, we can see why we’ve lost control over our economic lives and political futures. The solution isn’t accepting artificial constraints. It’s learning about the economic tools that could restore genuine choice and democratic power for everyone. I’ve developed a comprehensive framework for how these monetary insights translate into specific policies in Opportunity Economics.

The choice is ours. But first we must understand what choices are actually available.

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Further Reading

Primary Sources and Contemporary Analysis:

• Ruml, Beardsley. “Taxes for Revenue Are Obsolete.” American Affairs, January 1946.
• “Opportunity Economics: How to Make Capitalism Work for Everyone.” June 24, 2025.
• “Economics is not a Science.” June 24, 2025.
• “Why Monetary Systems Matter: A Response to Hard Money Misconceptions About Money, Debt, and Government Spending.” November 9, 2025.
• “The U.S. National Debt is Caused by UNDERSPENDING. We Can Pay it Off Anytime, But We Don’t Have To, Because We Have a Soft Money Economy.” June 14, 2025.
• “How Corporate-Friendly Accounting Rules Create a $30 Trillion Transfer from Consumers into Wealthy Pockets.” June 24, 2025.
• “50 Years of Economic Myths Have Delivered Americans Into Technofeudalism.” July 3, 2025.

Modern Monetary Theory Foundations:

• Mitchell, William, L. Randall Wray, and Martin Watts. Macroeconomics. Red Globe Press, 2019.
• Kelton, Stephanie. The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy. PublicAffairs, 2020.
• Wray, L. Randall. Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems. Palgrave Macmillan, 2015.

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Note on Federal Reserve Confirmation: The Federal Reserve Bank of St. Louis has confirmed the fundamental principle underlying Ruml’s analysis, stating: “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent.” This affirms Ruml’s core insight that sovereign currency issuers face fundamentally different constraints than households, businesses, or state and local governments.

On the Path Forward: Reversal remains possible through collective action. The first step is collective education: understanding how economic systems actually work rather than accepting mythology designed to exploit us. Learning to decode economic language reveals how phrases like “fiscal responsibility” function as weapons rather than wisdom. Understanding how government finance actually operates shows why the constraints we’ve been taught to accept are artificial rather than real. Individual understanding becomes collective power when enough people recognize we’ve been systematically deceived about what’s economically possible.