ORANGE COUNTY VOICES : Overtaxing the Executive Stifles Incentive : Clinton’s plan to penalize top earners is illogical. They are the ones with the wherewithal to lead our recovery.

Taxing the rich to fund the government’s operations is not a new idea. It began in 1913 with passage of the 16th Amendment, and by the 1920s income taxes on rich individuals accounted for over 25% of all federal tax revenue. During the 1940s, it rose to a peak of 49%, and in the process was transformed from a tax on the rich only to a tax paid by almost all income earners. Some degree of progressiveness was built into the tax-rate structure then and remains with us today, so that the rich pay a higher percentage of their gross income than people of more modest means.

The debate always rages whether the rich should be taxed even more than they are in order to foot the bill for government or whether the prospect of additional taxes will stifle the incentive to get even richer and hence reduce their contribution to Washington’s coffers.

President Clinton has proposed raising the top marginal tax rate on household incomes of $250,000 or more to 39.6% (from 31%). In addition, he proposes to extend the 1.45% Medicare tax paid by both the employer and employee to all income, to raise the top corporate income tax rate to 36% (from 34%) and to treat that part of any corporate executive’s salary above $1 million as a non-deductible expense for corporate income taxes.

The new Securities and Exchange Commission rules on disclosure of executive compensation and its insistence that corporate boards relate executive pay to company performance in proxy statements ought to provide enough information for shareholders to regulate executive compensation without resorting to such Draconian measures. Yet the President seems clearly of a mind that executive compensation is out of control and must be curtailed. And, at the same time, he wants to tax the rich even more. Double whammy. A case of biting the hand that feeds you (us).

In a period of economic recession, one really has to question the wisdom of a policy that penalizes with special force that group of people who have the wherewithal to lead our recovery.

The impact on top-earning Orange County executives and their companies of the Clinton tax proposal would be significant. In The Times’ latest list of the “Orange County 100,” 26 executives had total compensation greater than $1 million for fiscal year 1992. Were the Clinton package in place, the companies represented by these executives would have had to pay $6,735,945 in additional taxes. That’s money not going into stockholder dividends or being retained for investment purposes. Assuming all this incremental income is taxable, the 26 individuals themselves would have had to pay $4,282,238 in additional federal taxes. The top-paid executive on the list, Adam Jerney of SPI Pharmaceuticals, would have contributed $351,491; his company, $955,123.

As to companies, Fluor Corp., with five executives on the list, leads the pack when it comes to impacts on the corporate bottom line. Fluor’s 1992 corporate tax burden would have increased by $1,595,166, with Rockwell International not far behind at $1,448,501. While the consequences of such numbers on the normal profits of big corporations are not great, for smaller companies on the list the impacts climb to upward of 8% of net profits. Faced with such an impact, a board might limit or reduce executive pay, essentially passing on some of the corporate tax burden to the individuals and affecting them even more negatively.

Raising marginal tax rates on the top 1% of U.S. households is at least a strategy that has some basis in history whether or not it’s a good idea now.

But the idea of capping the deductibility of corporate salaries seems to be a completely new thought, and one that is ill-timed, illogical, probably superfluous and, hopefully, ill-fated. Under Clinton’s proposal, a rock star or a highly paid athlete is likely to fare a lot better than a corporate executive. While the Michaels Jackson and Jordan create a lot of fan interest, they don’t create very many jobs.