In 1943, a popular American radio quiz show -- Take It or Leave It -- made Beardsley Ruml one of its $64 questions. Who was he? The format of the show was simple. Contestants were asked a series of questions. The first question was worth $1. The prize doubled for each successive correct answer. The seventh and final question was worth $64. After each correct answer, contestants could walk away with their winnings or could try to double them. Later, in the 1950s, the show moved to television, with inflated prize money, as The $64,000 Question. It was the wartime radio show, though, that made the $64 question a definitive test of quick recall and IQ. So who was Beardsley Ruml anyway?
Mr. Ruml was a thinker. He grew up in Iowa, a young prodigy who finished high school with grades of 98 per cent or higher in every subject. He entered Dartmouth University at 16. He became an economist, a psychologist and a sociologist. He taught at the University of Chicago. He advised Republican President Herbert Hoover in the 1930s. He advised Democratic President Franklin Roosevelt in the 1940s. He was chairman of the Federal Reserve Bank of New York. He was treasurer of R.H. Macy & Co. The post carried no responsibilities -- Macy's paid him to think. "Most people have a body with a head to guide it," Life magazine observed in a wartime profile of him. "Ruml has a head with a body to get it around."
After Pearl Harbor, at the end of 1941, President Roosevelt and Congress dramatically raised personal income tax rates to finance the war effort -- and expanded by millions the number of people who would be required to pay them. In the past, people had simply mailed cheques once a year, every March 15th. Now, as the 1943 deadline approached, a Gallup poll revealed that only five per cent of 40 million taxpayers were saving the money they would need to pay their taxes. A sense of crisis developed. "Suppose we have to go out," Treasury Secretary Henry Morgenthau mused, "and arrest five million people?"
It was Mr. Ruml who solved the problem. He knew that shoppers at Macy's preferred to pay for things in instalments. He proposed that the government deduct taxes from people's paycheques on a weekly basis. Thus Mr. Ruml invented the withholding tax, now used everywhere in the world. In the U.S. Treasury Department, a 30-year-old economist named Milton Friedman ironically helped implement Mr. Ruml's plan -- which, he later lamented, "made possible a government too large, too intrusive, too destructive of freedom."
As chairman of the Federal Reserve in New York, Mr. Ruml thought that the U.S. should stop taxing corporate income. Sixty years ago, he made the case in a speech to the American Bar Association. With the endless tinkering of corporate tax rates that passes now for reform in Canada, Mr. Ruml's arguments are as relevant in 2006 as they were in 1946. Perhaps, indeed, more so. "The corporation income tax must go," Mr. Ruml said. "Taxes on corporation profits have three principal consequences and all of them are bad.
"The money taken from corporations must come from the people directly, in higher prices. Or from the corporations' employees in wages lower than they otherwise would be. Or from corporations' shareholders in lower rates of return on their investments.
"It is impossible to know exactly who pays how much of the taxes on corporation profits. It is certain, however, that the stockholder does not pay all of it and, indeed, he may pay very little of it. This tax becomes another cost of production and gets passed along, either in higher prices or lower wages -- which includes inferior work conditions.
"Suppose the corporation income tax were removed. Where would the money go that is now paid in taxes? If the industry is highly competitive, as it is in retailing, a large share would go to lower prices. If the industry is strongly organized, a large share would go to higher wages. Only if the industry is neither competitive nor organized nor regulated -- of which industries there are very few -- would a large share go to stockholders."
Mr. Ruml asserted that the "most conspicuous" distortion caused by corporate taxes was the bias they produce for debt financing over equity financing. Since corporations paid no income tax on the deductible cost of borrowed money, "the scales are always in favour of debt financing." The country itself would be much stronger, he said, were more investment to flow from equities rather than bonds. He concluded that the many subsidies hidden in corporate taxes had "softened the fibre of management" and had "resulted in excess timidity."
Mr. Ruml insisted that the case for ending the corporate tax was overwhelming. "It is evil," he said. "It should be abolished."
Could the government afford to end it? Absolutely. This, though, wasn't for him the $64 question. Mr. Ruml was a New Dealer. He repudiated corporate taxes as a matter of simple justice. They weren't equitable. They weren't progressive. And he was right. They aren't.