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Home Publications Op-Eds & Columns The Tax Code in Action: Charity Starts at the Top

The Tax Code in Action: Charity Starts at the Top

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Dean Baker
Truthout, March 31, 2014

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According to press accounts , former Senator Jim DeMint is likely earning in the neighborhood of $1 million a year for heading up the Heritage Foundation, a right-wing Washington think tank. The fact that right-wing think tanks pay their top people lots of money is not exactly news. After all, they have lots of wealthy donors who are happy to cough up this sort of money. But the part of the story that might get people upset is the fact that the rest of us are subsidizing Mr. DeMint’s hefty paycheck.

This subsidy comes through Heritage’s status as a tax exempt organization. This gets them out of paying various state and local taxes, but most importantly it means that the contributions it receives are tax deductible for the rich people who make them. That means that when the Koch brothers or their equivalent throw $100 million at the Heritage Foundation, $40 million of this contribution comes out of their tax bill.

That is the way the charitable deduction works. The same logic applies when rich people make large contributions to progressive organizations; much of the contribution is offset by a lower tax bill. Right-wing organizations may benefit more from the implicit subsidy because they get more contributions from rich people, but Heritage is not getting special treatment.

However it is still worth asking about Mr. DeMint’s salary. The charitable deduction exists because it is assumed that the charitable organizations are serving a public purpose. Is paying Jim DeMint over $1 million a year really a public purpose?

The right-wing thinkers at Heritage may object that they have the right to pay their president whatever they feel like. Of course they are right, but the issue here is whether they have the right to force taxpayers to subsidize the bloated salary they pay to their president.

In keeping with Heritage’s free market principles, we could say that they have the option to pay their president absolutely as much as they want. However, if they want to have a public subsidy through tax exempt status, they will be restricted in how much they pay people at their organizations.

For example, we could cap the top pay from non-profits at twenty times the median pay in the economy, which is currently around $40,000 a year. This means that they could pay DeMint up to $800,000 a year and preserve their tax exempt status. If they want to pay a higher salary their contributors will have to live without getting a tax deduction. (Using the economy-wide median, rather than the organization’s median, prevents easy gaming, like outsourcing janitorial services.)

Heritage and other non-profits will undoubtedly complain that they can’t get good help for such low pay. Since 99.9 percent of the workforce earns less, they may just have to be a bit more creative in their employment practices. Besides, if they are that poorly run that they can’t find good help for $400,000 or $500,000 a year, why should taxpayers subsidize them?

Needless to say, non-profits will try to game such a provision. For example, universities will outsource management of their endowments, since people managing billions of dollars could easily earn over $1 million a year in the corporate sector. But there is likely to be a limit to such gaming. After all, will Harvard, Yale, and Princeton want to contract with Ivy League Presidential Services for their top management?

There are literally thousands of highly talented and committed people who would be happy to run such prestigious institutions even without a seven figure salary. The ones who would consider working for $500,000 a year too great a sacrifice should work somewhere that doesn’t depend on taxpayer subsidies.

We have seen enormous growth in inequality in the last three decades. The conventional wisdom is that this inequality was simply the result of changes in the market due to technology and globalization. But there is nothing natural about the government giving tax exempt status to big money non-profits. That is a government policy that can be changed. And it is hard to see why it shouldn’t be.


Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

 

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