Progressive Tax System Is Fair And Necessary

Politicians in Europe and the United States have taken keen interest in the issue of excessive CEO pay. Even CEOs who are compelled to resign over the poor results of their companies walk away with multimillion-dollar bonuses.

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For Russia, the question of salaries for top CEOs is both important and largely irrelevant at the same time. It is important because a significant number of the country's largest firms are state-owned, and this means politicians are responsible for setting remuneration policies that will motivate managers. That is not as simple as it sounds, however. If salaries are too low, the managers will be tempted to steal from the company, but if they are too high, it will displease voters.

In addition, excessively high salaries for CEOs of state-owned companies will attract talented managers from the private sector, and this, on the whole, is bad for the economy. But this problem is irrelevant for now because economic growth in Russia is so high that there is little chance of any widespread firing of CEOs.

The simplest way to regulate CEO salaries is through taxes. Russia currently has a flat personal income tax of 13 percent, and this has one distinct advantage: The taxes are easy to collect. Even in more developed economies, wealthy individuals spend a substantial amount of money trying to minimize their tax liabilities and lobbying legislators for favorable tax laws. A flat tax saves the time and expense of these efforts. On the other hand, the low 13 percent personal tax rate acts as a stimulus to Russian companies to pay CEOs enormous salaries.

Making the transition to a progressive tax system is a difficult task, but the government could begin with one simple measure -- institute a progressive inheritance tax in which the rich pay far more than people of moderate means. Furthermore, any inheritance of less than 30 million rubles, for example, would be tax exempt. An inheritance tax would not hamper people's desire to work, and it would lower economic inequalities in the next generation.

You might object and say that people could easily avoid paying inheritance tax by re-registering their property in their children's names. But that is actually a good thing, because when property passes from one generation to the next, it strengthens ownership rights as a fundamental legal institution.

Konstantin Sonin, a professor at the New Economic School/CEFIR, is a columnist for Vedomosti.