Are Tax-Free IMF Salaries Inflated?: Echoes

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By Joseph J. Thorndike

The International Monetary Fund has long been considered a good place to work. Salaries are high and benefits are plentiful. Ask Christine Lagarde, who's getting a pay package worth about $550,000 in her new role as managing director.

Lagarde's pay has drawn some scrutiny to the IMF's perks, and not for the first time. Critics have complained for decades that the fund's employees (and their counterparts at the World Bank) are allowed to live large at taxpayer expense.

In 1998, U.S. Representative Spencer Bachus, an Alabama Republican, objected to increasing funding for the IMF by reciting a list of perks given to the fund's employees. “We are asking the U.S. taxpayers in this funding request to reimburse the employees of the IMF for income taxes,” Bachus said, “for private school costs, for tuition, and not only that, but for salaries higher than those paid by the U.S. government."

Such complaints were present at the creation. During the famous 1944 economic conference at Bretton Woods, where the IMF was created, American and British politicians clashed over salaries for their planned bureaucracy.

U.S. officials, led by Assistant Treasury Secretary Harry Dexter White, proposed a lavish pay structure, including $30,000 a year for the IMF managing director and $17,500 for its various executive directors (roughly $375,000 and $215,000 in 2010 dollars).

British delegates, including economist John Maynard Keynes, were aghast. “Keynes considered them monstrous,” recalled one U.S. official of the salary numbers. In a closed-door meeting, Keynes questioned White’s motives, noting that he‘d been tapped for the U.S. executive director spot.

Ultimately, the Americans got their way (as they did with most other aspects of the Bretton Woods agreements).

But controversy over IMF salaries was far from over. Complaints surfaced in Washington, especially among Republican lawmakers.

"This super set-up to furnish soft jobs for the faithful is just one more burden upon the backs of the taxpayers," declared Representative Daniel Reed, a New York Republican. High salaries had been defended as a means to attract talent from the private sector. But, as Reed pointed out, many IMF and World Bank officials were actually recruited from government jobs.

The Chicago Daily Tribune predicted a backlash. "The administration's action in rewarding New Deal faithfuls with lush jobs on the staff of the World Bank and similar organizations at double their government salaries with their income taxes prepaid has begun to backfire," the paper reported.

Critics focused on the "tax free" status of IMF and World Bank salaries. Technically, the compensation was “net-of-tax” for U.S. citizens, not tax free -- they were paid inflated salaries to compensate for their personal tax payments. (Foreign employees were exempt.)

Harold D. Smith emerged as the unhappy symbol for this arrangement. Smith had resigned as Truman's budget director to become vice president at the World Bank. In doing so, he traded his taxable $10,000-a-year salary for a net-of-tax $22,500 package at the bank. Similarly, as Keynes had pointed out, Harry White traded his $10,000-a-year Treasury post for a $17,500 gig at the IMF.

At least one key official declined the net-of-tax arrangement. Eugene Meyer, first president of the World Bank, refused his gross salary of $65,000, which would have left him with $30,000 after taxes. Instead, Meyer -- a wealthy financier and publisher of the Washington Post -- agreed to a straight $30,000.

For most IMF employees, however, the net-of-tax salary structure was more than welcome. The IMF’s first managing director, Camille Gutt, told reporters in May 1946 that he was receiving an “avalanche” of resumes from people attracted by the tax arrangement.

Ultimately, the distinctive tax treatment of IMF and World Bank salaries remained intact. But it also remained a sore point. Critics of the burgeoning international bureaucracy have always been quick to point out lavish pay packages.

And why shouldn’t they? Christine Lagarde’s compensation easily exceeds the $400,000 that President Barack Obama gets from the U.S. government.

And he pays taxes on that.

(Joseph J. Thorndike, a contributor to the Echoes blog, is the director of the Tax History Project at Tax Analysts and a visiting scholar in history at the University of Virginia. The opinions expressed are his own.)

To contact the author of this blog post: Joseph J. Thorndike at

To contact the editor responsible for this blog post: Timothy Lavin at

-0- Jul/22/2011 13:23 GMT