Many people have heard of the Ruml plan — well, many tax people, at least. But it’s reasonable to assume that even people unfamiliar with Beardsley Ruml — scholar, business leader, presidential adviser, and public intellectual — are well acquainted with his greatest invention: income tax withholding.
To be clear, that last statement is unsupportable. Not that withholding wasn’t a great invention, if you’re inclined to define greatness in terms of public finance, but withholding was not Ruml’s brainchild.
The Civil War income tax had provided for the collection of some income taxes “at the source.” And even after the expiration of that wartime measure, withholding was resurrected by the drafters of the 1895 income tax and its more durable descendant, the Revenue Act of 1913.
Withholding was also part of Social Security, Franklin Roosevelt’s most durable achievement in the realm of domestic policymaking. Enacted in 1935, Social Security was funded with a payroll tax, collected at the source through a novel system of paycheck withholding. (Prior analysis: Tax Notes Federal, Feb. 26, 2024, p. 1572.)
Withholding also existed in other countries long before Ruml took his fiscal star turn in 1943. It can be found in early-19th-century Britain, for instance, and possibly even as far back as ancient Rome. But the details hardly matter, at least in terms of Ruml’s story. That’s because if Ruml didn’t invent withholding, he played a crucial role in making it a pillar of U.S. public finance — and U.S. governance more generally.
Conservatives have long recognized the importance of withholding, and of Ruml. “This was more than change, it was transformation,” wrote Amity Shlaes in her 1999 book The Greedy Hand. “Government would put its hand into the taxpayer’s pocket and grab its share of tax — without asking.”
That sort of collection technique is the way you build a Leviathan.
Not About Withholding
But for all his importance, there’s another problem with giving Ruml too much credit for withholding: He didn’t really care much about it. Ruml’s real focus was on a question of tax timing, not the mechanics of tax collection. He rose to fame as the father of the “Pay-As-You-Go” tax plan, which was just a well-branded, expertly marketed form of current collection.
Reduced to its fundamentals, Ruml’s proposal was simple: He suggested that individual income taxes paid over the course of a year should be based on income earned during that same year. That’s not how things worked between 1913 and 1943. When drafting the first modern income tax, its creators required tax payments made during the current year to be based on earnings from the previous year.
For a variety of reasons, many of them compelling, Ruml wanted the nation to switch to a system of “current collection,” with payments due on income as it was earned.
Withholding was linked to current collection, of course, since it facilitated timely and accurate payments. As a practical and legislative matter, it may even have been a necessity. But the two ideas were conceptually distinct, even if they were politically enmeshed in 1943.
Still, it’s reasonable to call Ruml the father of withholding, as well as current collection. Both concepts were enshrined in the Current Tax Payment Act of 1943, and no one did more to shape that legislation than this brainy, creative, consciously indolent public intellectual known for his ability to market other people’s good ideas.
Ruml’s Rise
Ruml got his start at Dartmouth, where he earned a Bachelor of Arts in 1915, and the University of Chicago, where he received a doctorate two years later. According to the last installment of a three-part profile in The New Yorker, Ruml impressed his professors, who then “shot him ahead in a series of rapid forward passes” to a succession of good jobs.
His most charming quality was apparently his commitment to originality. “He had the remarkable faculty,” the magazine observed, “of taking nothing for granted and approaching every problem as if it were something entirely new.”
(That description captures the manner in which a middle-aged Ruml approached the question of income tax collection during World War II, including both withholding and current collection. But that’s jumping the gun: back to Ruml-as-wunderkind.)
After getting his doctorate in psychology with a specialization in mental testing, Ruml embarked on his speedy professional ascent. He spent a few years advising federal policymakers during World War I, helping the War Department with personnel issues. After the war, he secured a position advising John D. Rockefeller Jr. on his philanthropy projects. In 1922 he got his first big-name job when the trustees of the Laura Spelman Rockefeller Memorial chose him to be the charity’s new director. He was 27.
Apparently, the trustees had surprised themselves. As The New Yorker observed, “They eyed him much as the dignified officials of Rome must have eyed Caligula’s horse when it was sworn in as a consul.”
Adding to the trustees’ discomfort was Ruml’s refusal to serve as their rubber stamp. When asked how the foundation should spend its $74 million endowment, the new director proposed major initiatives in social science disciplines that he considered especially important: sociology, political science, economics, and psychology, for instance.
“Some of the veteran Rockefeller advisers regarded the social sciences as drawing-room and debating-club topics,” The New Yorker reported. They were more inclined to spend money on real science conducted by real scientists: Medicine and laboratory research were their preferred funding targets.
But Ruml convinced the dubious trustees to follow his instincts. And his early success impressed many observers, including otherwise-jaded journalists like the one writing The New Yorker profiles. “Ruml’s brain has always been a factory of plans, ideas, and formulas for getting things accomplished,” the magazine gushed. “He has devoted a considerable part of his life to pulling the false whiskers off difficulties that were masquerading as impossibilities.”
That approach sounds very much like the way Ruml attacked the question of tax collection. But again, we’re getting ahead of ourselves, as were those admiring, credulous writers at The New Yorker, who made the same link to Ruml’s later tax work. “In the beginning, [Ruml] was generally advised that his pay as you go income-tax plan was ‘politically impossible’; he went ahead with it, however, because years of experience had taught him that the average impossibility was a pushover.”
Irritating Others
Despite his success (or perhaps because of it), Ruml rubbed some people the wrong way. Rockefeller advised him to be careful with the fragile egos of academia and modern philanthropy. “You know,” he told the young Ruml, “a Newfoundland dog is a very fine dog, but if he steps on your toes, it hurts, even if he didn’t mean it.”
Ruml stayed with Rockefeller for seven years, leaving in 1930 to become dean of social sciences at his alma mater, the University of Chicago. Once again, he stepped on some toes. But this time, Ruml couldn’t win over the doubters; in 1933, the disgruntled faculty showed him the door. (The swooning New Yorker insisted that Ruml had been awed by the éminences grises of the university and decided to depart on his own terms.)
Predictably, Ruml failed upward. In 1934 he accepted a position as treasurer of the R.H. Macy department store chain. The unusual move prompted a memorable observation from Maude Phelps Hutchins, artist, author, and spouse of the president of the University of Chicago. “He left ideas for notions,” she quipped as Ruml decamped for his stint at the retail giant.
Ruml was aware of the optics, and he wasn’t above his own snarky wordplay. Asked by one Chicago professor to describe the difference between a department store and a university, Ruml had a ready response: “In business the problems are intellectual.”
The job at Macy’s involved precious little bean counting but plenty of not-so-idle daydreaming — the perfect job for an “idea guy.” Macy’s President Percy Straus was explicit about what he wanted from his house intellectual. “You’ll have no duties whatever, except to annoy me,” he said.
Ruml made the most of his professional freedom, filling out his workdays with a series of public service posts. By 1934 he had already advised both Republicans and Democrats on important policy issues. He had taken a special interest in farm policy, advancing a “domestic allotment” plan that ultimately became the basis for the New Deal’s Agricultural Adjustment Act.
More relevant to his later tax work, Ruml also took a position in 1941 as chair of the Federal Reserve Bank of New York. Like his shift from academia to business, this move raised some eyebrows, especially at the bank itself. “There was a feeling at first that one of Macy’s wonderful Thanksgiving Day balloons had been foisted on the financial district,” The New Yorker observed.
The Fed gave Ruml a useful vantage on the federal tax reforms underway during those final years before the United States entered World War II. But it also left him one step removed from the tax policy institutions of American government. This outsider status probably served to aid rather than inhibit his subsequent effort to remake federal tax collection.
Unusual Perspective
By the time Ruml took center stage in the tax debates of 1942 and 1943, he was something of a public policy unicorn. “Few have served such an apprenticeship before starting on a public career,” The New Yorker wrote. “With one foot in the countinghouse and one in the ivory tower, he is a rare specimen.”
Ruml remained true to his academic training as a psychologist, which encouraged a distinctive approach to many tough problems. As a general rule, he was always focused on how people perceived a situation and how they reacted to it. His innovations were rooted in his convictions about the nature of human behavior, including the fears, frustrations, and hopes that people brought to any situation.
As his college mentor had remarked, Ruml was a master of the fresh look. There was nothing he liked better than finding new ways to solve old problems, and his career was marked by a series of creative policy proposals. “The life of Beardsley Ruml,” The New Yorker observed, “is a series of Ruml plans.”
Often, however, Ruml was less focused on developing his own proposals than he was on marketing the ideas conceived by others. He was certainly a creative thinker in his own right, but he was often more agent than innovator. “A Ruml plan is not necessarily a completely new invention,” The New Yorker noted. “Ruml’s method of tackling problems is to sit in a chair and do nothing. With his mind released from ordinary influence, he can command wider vistas of fact and theory than when methodically studying a subject.”
Ruml, in other words, was all about seeing the forest rather than getting bogged down in the trees. But he was always careful to credit the experts who did the intellectual spadework.
It diminishes Ruml to reduce him to the role of a marketer or popularizer; seeing the big picture — and being able to describe it to others — is no small thing. But there’s truth to the notion that Ruml built a career on other people’s intellectual brilliance.
Still, in 1942 Ruml was thinking about tax collection. More specifically, he was thinking about the ideas that fiscal experts were developing about tax collection. And those experts were increasingly focused on moving the federal income tax toward current collection, aka pay-as-you-go tax collecting.
The Problem
Almost everyone in 1942 agreed that current collection was desirable, especially in light of the wartime fiscal revolution then underway. The revenue needs of World War II (and the nation’s rearmament program that preceded Pearl Harbor) were enormous. Lawmakers had responded with a series of tax increases, and in the spring of 1942, they were planning still more.
Rates for the individual income tax were slated to rise dramatically, as they had for several years. The top marginal rate increased from 79 percent in 1940 to 88 percent in 1942; it would reach 94 percent by 1944. Taxpayers of more modest means saw similar hikes; the bottom-bracket rate increased from 4 percent in 1940 to 19 percent in 1942, on its way to 23 percent in 1944.
More important, the number of people filing returns was exploding. In the face of a raging global conflict, lawmakers had asked millions of new taxpayers to help foot the bill for military preparedness. Exemptions fell rapidly, both for individuals and families; the number of returns processed by the Bureau of Internal Revenue rose in response, from 7.8 million in fiscal 1940 to 14.8 million the following year. The figure would continue to soar, reaching 26.3 million in fiscal 1942, 37.0 million in 1943, and 43.1 million in 1944.
The Revenue Act of 1942, which lawmakers were drafting as Ruml offered his plan for current collection in the spring of that year, promised to continue the transformation of the federal tax system. And policy experts were anticipating problems, especially as new taxpayers tried to make sense of their new responsibilities.
Many worried that neophyte taxpayers would be unprepared. Once added to the rolls, they would be expected to pay taxes on the previous year’s income. But if they had failed to anticipate those tax bills, they would be unable to pay. Things might be even worse for anyone who had suffered a change in circumstance, like a job loss.
Ruml to the Rescue
These were the problems that Ruml wanted to solve with his Pay-As-You-Go tax plan. The capitalization is useful for distinguishing Ruml’s famous proposal from similar but less slickly packaged versions of the same idea.
In the media, however, the Pay-As-You-Go plan was often described simply as the Ruml plan. With a gesture toward modesty, Ruml explained his thinking about this shorthand. “The plan as it stands today is a combination of the ideas of many people and I have often thought of depersonalyzing the plan, since some feel that the name causes unnecessary resistance in certain quarters,” he told an audience at the National Tax Association’s annual meeting. “But others of my friends have urged that in view of the fact that there has been such a rush to propose all sorts of so-called ‘pay-as-you-go’ plans, the name ‘Ruml plan’ should be held on to as a way of identifying certain principles that should be basic to any plan.”
Apparently, these other friends convinced a reluctant Ruml to embrace the eponymous nomenclature.
Ruml conceived of his famous tax plan while riding a train from Chicago to New York — the perfect setting for one of his sedentary think sessions. But as The New Yorker pointed out, the plan was also derived from his experience at Macy’s. Retired employees had been struggling to pay taxes on the income they had earned during their final year of work, since their pensions were typically smaller.
Ruml framed the employees’ struggles as a function of “tax debt.” And he located its origins (correctly) in the Revenue Act of 1913.
“When the federal income tax bill was passed in the United States in 1913, it had one defect which at the time seemed of no practical consequence but which has since come to have the greatest importance,” he told the National Tax Association. “This defect was that a citizen was required to pay in the year 1914 a tax assessed on his 1913 income. In this way, we got started on a vicious practice of paying out of one year’s income a tax on the year that had gone.”
The problem wasn’t serious in 1913 because the income tax was aimed at a relative handful of wealthy, financially sophisticated taxpayers who understood the importance of saving for next year’s tax bill. Also, rates were generally low, at least for the first few years, making the stakes rather low for everyone involved.
But as the income tax grew, so did the problems with this sort of delayed collection. “The debt which people owe to the federal government for tax on their last year’s income has become a national danger,” Ruml declared. Taxpayers of modest means — millions of them slated to join the tax rolls as a result of the 1942 tax legislation — would almost certainly face 1943 tax bills they had no capacity to pay.
Ruml was eager to solve this problem by switching to a system based on current collection. Beginning immediately, the federal government would withhold taxes from wage and salary income, applying the money to taxes due on current income. So in 1943, for instance, taxpayers would see paycheck deductions for the money they earned in 1943.
So far, so good. But what about the taxes on 1942 income? No taxes had been withheld during that year, and taxpayers would still presumably have to pay the taxes in 1943, using the old rules of noncurrent collection.
Paying that delayed bill was always going to be a challenge — that’s why Ruml and others had been talking about current collection in the first place. But paying that delayed bill while also making payments for income earned in 1943 would be impossible. It was unreasonable to ask taxpayers to double up.
But Ruml’s solution was simple: Forgive the 1942 tax bill entirely. There would be no disruption of the money coming into the Treasury since taxpayers would start paying on 1943 income right away. The only thing being forgiven was some notional tax debt, which was itself hardly more than an accounting concept.
The only moment when such a debt would matter was when the world ended, Ruml insisted — when people examined “the position of the Treasury on Judgment Day.” And at that point, he added archly, “these would be bad debts in any case.”
Needless to say, taxpayers were inclined to like a proposal that involved completely forgiving a year’s worth of tax payments. And just as predictably, tax officials of the federal government were aghast at the proposal, pointing out that rich people would get much larger windfalls than taxpayers with lower incomes.
But Ruml was unpersuaded by such objections. And he was explicit about the political stakes in this debate. “The American citizen distinctly does not like to have a large debt, particularly a large tax debt, hanging over him,” he warned.