Dean Baker
Al Jazeera America, June 16, 2014

See article on original website

We usually think of charities as being a story where money flows down from those on top to those who are most in need. But in our vibrant 21st century economy, charity often flows in the opposite direction, with rest of us subsidizing the incomes of very rich. That is the implication of several recent news stories.

For example, we have John Sexton the president of New York University. The university was recently in the news because of a story reporting that workers building its Abu Dhabi campus are often beaten and have their wages stolen. This campus is part of an ambitious expansion plan designed by Sexton, who reportedly makes $1.5 million a year and stands to pocket a “longevity bonus” of $2.5 million if he stays into 2015.

The University of Chicago is another school where the president, Robert Zimmer, appears to be doing rather well financially. Mr. Zimmer’s compensation for 2013 was reportedly $1.9 million after having spiked to $3.4 million the prior year. This compensation comes in spite of the fact that the school has an operating deficit and may be at risk of a credit downgrade.

A study by the Institute for Policy Studies found that student debt and low-paid faculty increased more rapidly at the universities with the 25 highest paid presidents than the national average. At the very least this suggests high presidential pay is not associated with scoring well in terms of either holding down student debt or minimizing the share of adjunct faculty.

There is undoubtedly much more that could be said about high-paid university presidents or heads of other non-profits, who don’t seem to be earning their keep. But this is not just a story of university boards possibly using bad judgment in designing compensation packages for top management. The pay for these millionaires comes directly out of the pockets of the rest of us in the same way as the food stamp or disability payments that get conservatives so excited.

These institutions all enjoy special tax status as charitable organizations. Their wealthy contributors can deduct the money they give to New York University or the University of Chicago from their taxable income. Since most of their contributions come from people in the top tax bracket, taxpayers are effectively paying 40 cents of each dollar these universities receive in contributions. That means that we are picking up a large chunk of the paychecks of Mr. Sexton, Mr. Zimmer, and the rest of gang.

If we took the extreme case and assumed that all of the university’s revenue came directly or indirectly from tax deductible contributions, then taxpayers would have paid roughly $600,000 towards Mr. Sexton’s 2013 salary and $680,000 of Mr. Zimmer’s paycheck. For comparison purposes the average annual food stamp benefit is roughly $1,600 per person. This means that taxpayers gave Mr. Sexton roughly as much they would 375 of the “takers” who get food stamps. We gave Mr. Zimmer as much money as we would give 400 food stamp beneficiaries.

Of course this comparison is not entirely fair. Universities get much of their money from tuition and other sources, so it is not correct to claim that all of their president’s pay came from tax deductible contributions. On the other hand, there are many charities and foundations that rely almost entirely on tax deductible contributions or the income from endowments that were created by tax deductible contributions. In these cases it would be reasonable to assume that roughly 40 percent of the pay for the presidents and other top executives came from taxpayers.

Most people would likely be bothered if they knew they were subsidizing the pay of some of the highest paid people in the country. Unfortunately, this fact is rarely mentioned in the news. We are far more likely to see news articles on people getting food stamps or disability.

There is a simple remedy for the high pay at tax exempt institutions: make it illegal. We can just put a cap on pay at tax exempt organizations say at 15 times the average production workers’ pay (@$600,000 a year). This would limit the subsidy that the rest of us provide to the very rich. 

This is not an interference with the freedom of the University of Chicago or New York University to pay their presidents whatever they like. They would just have to organize themselves as regular for-profit corporations. Then their presidents would have to figure out a way to rip-off the shareholders rather than the taxpayers. 

Fans of the free market should be completely behind this sort of initiative. After all, if they are upset when the government gives someone $1,600 a year for food stamps, how could they not be infuriated when the government gives several hundred times as much to university presidents or other highly paid executives at tax-exempt institutions? If these presidents are worth their paychecks then the private sector should be happy to cough up the money without needing a subsidy from the government.

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.