Preach It

Over at the Stanford Social Innovation Review, they make a cogent argument for limiting excessive salaries in the non-profit sector:

An average family participating in the federal Temporary Assistance for Needy Families (TANF) program costs taxpayers $400 a month. We pay $126 a month to the typical beneficiary of food stamps—the Supplemental Nutrition Assistance Program (SNAP).

By contrast, Susan Desmond-Hellmann, the CEO of the Bill & Melinda Gates Foundation, costs us $44,200 a month. [This is the amount subsided by the tax deduction, not her salary, which is 2½ times that] This figure may catch some readers by surprise, because they probably don’t think of themselves as paying the salaries of people who work at nonprofit organizations. But we do pay her that amount, and it is a problem.

The salary of the Gates Foundation’s CEO costs taxpayers money because we gave Bill Gates a large tax break that subsidizes his contribution to his eponymous foundation or any other philanthropy. If Gates was in the 40 percent tax bracket (a safe bet before the 2017 Tax Cuts and Jobs Act pushed by President Donald Trump), then the government effectively picked up the tab for 40 cents of every dollar that Gates decided to contribute to his foundation.

There is a tendency to treat tax deductions, for charitable contributions or other purposes, as being qualitatively different from direct government spending. This may be a convenient way of thinking for the people who most benefit from these deductions, who tend to be richer on average. But it is nonsense.

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We should have this fact in mind when we consider the purpose of the charitable-contribution tax deduction. In effect, we are saying that certain categories of activities are serving a general public purpose. If individuals choose to support these activities, through religious organizations, educational institutions, or philanthropic organizations such as the Gates Foundation, we will subsidize their contributions by allowing them to pay less in taxes.

This is a reasonable policy for the federal government. It provides subsidies for organizations that address a wide variety of social ends in diverse ways. These subsidies can help promote new and innovative practices that may ultimately be adopted more broadly.

However, the government does put conditions on the sorts of organizations that are eligible for tax-exempt status. For example, they must not be for-profit organizations. The government does not, at least explicitly, allow deductions for money paid to profit-making corporations. Nonprofits also must serve the general public purpose. I cannot have a charity to pay the person who mows my lawn. Nonprofits cannot advance a partisan political agenda.

This is important background for thinking about the money that taxpayers effectively pay to support the salary of the Gates Foundation’s CEO. Most people view the rise in income inequality as one of the major problems in the US economy. Desmond-Hellmann’s $1.33 million annual salary is way above the cutoff for the top 1 percent of US wage earners. In fact, it is far above the cutoff for the top 0.1 percent of wage earners.

While many factors have led to the rise in inequality, part of the story is the excessive pay of CEOs and other top executives. This is more an issue in the corporate sector, where the average pay of CEOs now approaches $20 million a year. Nonetheless, when pay for top executives in the nonprofit sector crosses the million-dollar mark, even at philanthropies such as the Rockefeller Foundation that worry about inequality, this is also part of the problem.

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In this case, we should keep our eye on the ball. The federal government is providing enormous subsidies to the bloated pay of top executives at nonprofits. This is simply not a good use of federal dollars, and it is hardly in keeping with the idea that nonprofits should be serving a public purpose. We can try to develop government policies to reverse market outcomes that generate inequality, but we should first end government policies that promote inequality.

I would note that some of the most highly remunerated employees at non-profits are coaches for NCAA Division I teams, which frequently are in the 8 figure range.

These high levels of compensation make a joke out of charities. 

First, they make a mockery of the whole concept of charity, and second, as behavioral economist Dan Ariely showed in his studies, very high levels of remuneration actually decrease performance.