Should withholding on interest and dividend income be repealed?; No

A high-powered, well-financed propaganda blitz by the American Bankers Association (ABA) has stirred up a lot of interest lately in a new law requiring withholding of taxes due on interest and dividends. But if the truth be known - unfortunately it cannot be found in the intimidating advertisements you may have seen - you will understand that the opponents of the law are withholding the truth about this new tax compliance provision. Because many banks, credit unions , and savings and loans only want to scare you, here is a quick list of the facts about withholding:

* It is notm a new tax.

* The law exempts almost all elderly and low-income Americans.

* Withholding will have at best an insignificant effect on earnings.

* Exemption involves no red tape - forms are simple.

* Unless you cheat on taxes, you have nothing to worry about.

Every year, the federal Treasury loses out on collecting $7 billion to $9 billion of taxes owed on interest and dividends: 11 percent of interest payments , and 15 percent of dividends are never reported. This steady drain of revenue only serves to drive up the federal deficit and place more of the tax burden on honest Americans who pay their taxes. But why should that be?

Recognizing the strain of unpaid taxes on the deficit, President Reagan introduced the withholding plan in his 1983 budget - and believe me, he hasn't changed his mind.

Before we consider the imposition of new taxes - surcharges, energy taxes, and repeal of the final installment of the President's three-year tax cut - we have an obligation to go through the IRS Code to make sure we are collecting taxes already owed the government. Unfortunately, it seems some financial institutions do not want to help in this compliance effort. If withholding is repealed, there will be a $20 billion hole in the budget during the next five years and, so far, the ABA has not suggested who is going to pick up that tab.

While banks should not hesitate to speak out on issues of concern, I believe they should do so accurately and responsibly, precisely because of the trust so many Americans place in their banks and bankers.

Unfortunately, the campaign to repeal withholding has hardly lived up to that standard. From my perspective, the tactics used by the ABA have reached an historic low, at least if one judges institutions like banks by the standards of trustworthiness and responsibility they hold out as their calling card.

Some of the splashy ads against withholding might even be funny if it were not for their flagrant distortions of such a serious subject.

For example, one ad says 10 percent of your interest is going to ''disappear.'' Another implies that paying your taxes is ''an insult.'' Just as bad, a prepared speech mailed to 14,000 bank executives proclaims the new tax law lets Congress ''loot'' your savings accounts. With such outrageous fiction being sold as fact, it is no wonder the public has been busy clipping mail-in coupons from newspapers. Regrettably, however, the public has been sold a bill of goods.

The ABA maintains that withholding will cost financial institutions and their customers ''untold billions'' of dollars. How? The answer, of course, is untold. The fact is, for a depositor with $1,000 in an account bearing 9 percent interest compounded quarterly, the loss of yield due to withholding will be less than 50 centsm per year. Even still, this estimate assumes that the bank does not take advantage of the option to have end-of-the-year withholding, which virtually eliminates any loss of compound interest. A spokesman for the ABA recently appeared on NBC's ''Today'' show and, when pressed on the point, admitted the effect of withholding on individuals' savings yield would be ''really rather insignificant.''

It may surprise you, but the new law has a number of special exemptions to protect elderly and low-income Americans who may need all of their interest and dividends to help pay living expenses: Single filing, age 65 - Tax liability of less than $1,500 Joint filing, one, or Tax liability of both, is age 65 - less than $2,500 Single, low income - Tax liability of less than $600 Married, low income - Tax liability of less than $1,000 Small accounts - $150 or less of annual interest

It should be noted that during the congressional debate over withholding the financial community pushed hard to eliminate any exemptions to the new law, presumably to make life easier for itself.

The withholding proposal was introduced by the President in his 1983 budget. The measure was approved by the Senate and scheduled for implementation this past December. But many bankers told us that they needed more time to gear up for compliance. As a result, I introduced an amendment - which Congress adopted - that gave financial institutions a six-month grace period to get ready, inform depositors, and refine the regulations. Instead, the ABA only used the respite to begin its massive campaign to kill the bill.

Don't be lulled into thinking that the opponents of withholding have savers' best interests at heart.