Reed Hastings, CEO of Netflix, publicly asked the government to raise his taxes in a NYT op-ed today. His position was not that of Warren Buffett, who has argued that taxes are unfairly low for the super rich. Rather, Hastings argued that higher taxes offer a more effective way to limit CEO incomes than pay caps. And he's right. To see why, we need to first understand why CEO salaries have gotten as high as they have.

In Econ 101, we learn that price is driven by supply and demand. When workers with a particular skill are scarce, they can charge higher wages. I often see this in the tech industry. For example, many companies still use antiquated mainframe systems that require regular maintenance, but few young programmers want to learn the outdated technology. As a result, there aren't enough mainframe developers to fill demand, which means that those few remaining in the industry earn a lot of money.

CEO salaries, however, are not driven by classic supply and demand. There are very few Fortune 500 CEO positions (only 500, in fact) and many more people with the will and means to do the job. While some candidates are more capable than others, being a CEO is not like being a mainframe developer where you either have the skills or you don't. For every CEO, there are plenty of eager VP's with solid management experience.

So if not supply and demand, then why? Some conjecture that top executive salaries are artificially inflated by corrupt board members in bed with their CEO's. But while there have certainly been examples of inept boards, there's no evidence that inappropriate executive-board relationships are widespread enough to create a significant market inefficiency. The fact is that the market value for good CEO's is just really, really high.

So if the market value of top CEO's is not driven by low supply and is not caused by a market inefficiency, what's behind it? We can answer this question by looking at another class of overpaid professional who have seen their salaries balloon in recent years: actors. As any struggling actor will tell you, there is no shortage of talented actors. New York and L.A. are swarming with them. So no supply problem. Nor is there evidence of widespread corruption that inflates the incomes of A-list actors.

So why are top actors paid so much? It's very simple. An A-list actor almost guarantees heavy box office turnout, so a movie with A-list stars is likely to gross much more than the same movie with B-list actors. For a producer, it's a no brainer. A B-list actor may be almost as skilled (or even more skilled) than an A-list actor and cost much less, but that A-list actor will bring in tens of millions more revenue, so it's well worth the extra millions to go A-list.

We see the same phenomenon in other high-grossing businesses, e.g. pop music, popular fiction, and professional sports. There many great musicians, writers, and athletes, but it's the elite few in certain categories that bring in the big bucks, both in terms of what they're paid and what they generate for the people who pay them. And what about those investment bankers that everyone has been pillaring lately? Investment banking is not an easy job, but there are many lower paying jobs that require more talent, e.g. scientists, artists, liberal bloggers, etc. Bankers command higher salaries than other professionals primarily because they work with very large sums of money. The difference between an excellent i-banker and a competent one can mean millions of dollars in savings, so a million dollar bonus is not a high price to pay, relatively speaking.

If the relative financial differences among actors and investment bankers is high, it's even higher among CEO's of Fortune 500 companies. A single CEO can turn a company into a juggernaut or a dead man walking (no offense to Deadman), meaning that billions of dollars are at stake. So what's a few extra million to help ensure that you've got the best that CEO that money can buy?

My point is not to argue that CEO's deserve their fat bonuses. From a fairness point of view, I don't believe that anyone deserve millions for anything, including actors, athletes, and i-bankers. But the market isn't fair. Moreover, the market is notoriously difficult to control. Companies are highly incentivized to highly incentivize their top executives. Trying to stop them from doing so is like trying stop a fire hose with your thumb. There's too much pressure; the water is going to find a way out. Boards and executives are geniuses when it comes to creative compensation.

That's why Hasting's proposal makes sense. Let the CEO's get their bonuses, but tax it up so that a higher percentage of their income goes into government programs or paying down the national debt. Furthermore, while massive CEO salaries may stand out because of the disparity between their pay and that of their employees, the top CEO's make up a very small share of the population. If we truly hope to address income inequality in this country, we need to go after all those actors, athletes, and i-bankers as well.