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Should withholding of interest and dividend taxes be repealed?; Yes

A grass-roots campaign to repeal the new 10 percent withholding tax on interest and dividends is now under way. A veritable avalanche of mail has poured into Washington, and congressional mail clerks report more letters on withholding than on any other issue in recent memory. Withholding would affect millions of savers across the country, and the American people are angry and concerned. Their letters point out what Congress should have known all along: withholding will discourage savings and investment, penalize the honest taxpayer, and create an especially heavy burden on our nation's senior citizens.

US government policy has been biased against savings for years. By the end of the Carter presidency, the American people were saving less than any other people in the Western world. In the second half of the '70s, only 2.5 percent of GNP went into net investment for plant and equipment, down 40 percent from a decade earlier.

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In 1980, we promised a change in policy, recognizing that savings and investment are the keys to economic growth. Many of our tax policies didm change - the top tax rate on all income was reduced, a new IRA law was passed, and estate and gift tax exclusions were increased. The 10 percent withholding tax would be a step backward. Savers would lose the benefits of interest compounding and automatic dividend reinvestment - instead of having that money in their savings account all year working for them, it would be sent off to the federal government.

Withholding would hurt the honest taxpayer. The Treasury Department estimates that nearly 90 percent of the people pay the taxes due on their interest and dividend income. Ten percent do not. Instead of zeroing in on that small percentage of tax evaders, withholding means everyone must pay. The Treasury Department also estimates a fiscal year 1984 revenue gain of $5 billion from withholding. Only $3 billion of that comes from increased compliance - people paying taxes they should have been paying all along. The rest is, in reality, an interest-free loan from the American people to Uncle Sam. That's a loan the American people can ill-afford to make.

As a result, billions of dollars will be taken out of the private capital market and will no longer be available for home mortgage loans, capital formation, or job creation.

Older Americans will be hurt the most. Almost half of all interest and dividend earning accounts belong to the elderly, children, and those with low incomes. Even though these people may be exempt from withholding, this exemption is not automatic. It is up to them to find out if they qualify, to get hold of the exemption certificates - one for each account - and to file them.

If the exemption forms aren't filed on time, either because the individuals didn't know they had to or because they were physically unable to do so, then 10 percent of all their interest and dividend income will be withheld. The result: people who need this income for everyday expenses (food, housing, medical care) will lose it to the federal government. It isn't until they file a tax return in the following year that this money would be returned. In the meantime, losing 10 percent of their interest and dividend income each month could force a noticeable change in the quality of their lives.

The American Association of Retired Persons strongly opposed the withholding tax last summer because, as it argued, ''we fear the exemption process will frequently fail to operate properly and a serious overwithholding problem will result.'' It also pointed out that, by placing the burden on the individual to exempt himself, withholding would force many elderly people into the taxpaying system who have not been required to file for years.

Those who have lost their jobs or have retired in the past few months would be caught in a Catch-22 situation. Money would be withheld from their accounts despite the fact that they have little or no income coming in this year, because the exemption is based on last year's taxable income.

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The withholding debacle is a prime example of what can happen when the bureaucrats in our nation's capital are set loose. Withholding is bureaucratic overkill, pure and simple - the million-dollar solution to a two-bit problem. A recent IRS study shows that an improved information reporting system, together with the compliance reforms passed in last summer's tax bill, could increase taxpayer compliance to 97 percent. By requiring the IRS to cross-check 1099 forms with the amount of income declared on every tax return, we could improve compliance without confiscating 10 percent of the interest income in every savings account in the country. The IRS seems to prefer withholding because it's easier to have the banks do the work than to spend the time and effort necessary to crack down on tax evaders themselves.

There is still time to stop this new tax scheme before July 1, when it is scheduled to go into effect. I have introduced legislation to repeal withholding and replace it with improved information reporting, and the bill, S. 222, has already gained 47 Senate co-sponsors. The American people are demanding action. Congress should vote now to repeal the withholding tax scheme.

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