Tuesday, March 16, 2004

Tax-Exempts: A Ripoff of Taxpayers

Today, on a different topic, ProfessorBainbridge.com quoted Berle and Means (The Modern Corporation and Private Property, 1933): "The separation of ownership from control produces a condition where the interests of owner and of ultimate manager may, and often do, diverge…." Well, that reminded me of tax-exempt organizations.

Taxpayers effectively "own" tax-exempt organizations. Every dollar a tax-exempt organization avoids paying in taxes adds a dollar to the collective tax bill of all taxpayers. So where do our tax dollars go, aside from subsidizing tax-exempts' often useless and self-aggrandizing activities?

Well, the truth about tax-exempt organizations is that they earn a profit, but it's not called profit. The managers of tax-exempt organizations -- in particular, major foundations, associations (lobbying groups), "public" radio and TV stations, large charities, and government-sponsored think-tanks -- take their profit in the form of six- and seven-figure compensation packages. That's quite a haul for fairly risk-free work in typically sumptuous surroundings. You have to screw up badly to lose a major contributor or long-standing government sponsor.

You'd think that tax-exempts' audit committees and boards would keep the lid on compensation. Ha! If it doesn't work in the private sector, where there's a profit motive, why would you expect it to work in the "quasi-public" sector where there isn't a profit motive? Tax-exempts typically justify their large compensation packages by reference to the large compensation packages of other tax-exempts. Well, you can see how that works; it doesn't even require overt collusion.

The solution isn't wholesale revocation of tax-exempt status or even repeal of the portions of the tax code dealing with tax-exempt status. It's simpler and more effective: Require tax-exempts to pay income tax at the prevailing corporate rate on all compensation (including typically tax-exempt benefits). Let the tax-exempts choose between funding compensation and funding those activities for which they purportedly exist. Let the tax-exempts incur the wrath of their contributors and government sponsors if they make the wrong choice.