US seeks to withhold interest

You've just received your latest bank statement and find you've earned a tidy for purposes of compounding. But wait, a notice says that 15 percent -- or $15 or the $100 --If you have too much interest withheld during the tax year you will get it back as a "refund" -- but without any effect of compounding.

If the Carter administration has its way, tax withholding on interest and dividend payments will go into effect for millions of American taxpayers next January. Intense opposition from banks, security dealers, and scores of irate taxpayers, however, could derail the withholding proposal, as has happened every time the issue has come up in Congress since first introduced by the Kennedy administration in the early 1960s.

The withholding plan -- part of the administration's anti-inflation package announced here in mid-March -- is triggering a political struggle on Capitol Hill not unlike the brouhaha that greeted earlier administration calls for "tax reform" and legislation to curb the "Three-martini lunch."

Taking its case for tax withholding on interest and dividends to the House Ways and Means Committee April 30 and May 1, the administration insists that the issue is really twofold.

First, by imposing withholding -- in the same way the Treasury already insists that employers withhold income from paychecks -- the government will be able to help balance the federal budget. Second, the Treasury argues, withholding will be an effective tool in bringing into line the 10 to 15 percent of all dividends and interest earnings not being reported for tax purposes.

According to the Treasury, if the withholding plan goes into effect next Jan. 1, it would generate a hefty $3.4 billion in revenues for the federal government's fiscal year ending Sept. 30, 1981.

That in turn, the administration argues, would help ensure a balanced budget for fiscal 1981.

For the next two fiscal years -- 1982 and 1983 -- the added revenue would equal $5.3 billion.

Although various dividend-interest withholding plans have been sent into political oblivion by Congress for almost two decades (the last time, in 1976), critics are more concerned this year.

"There's a strong tide running in Congress now for budget balancing," states Stephan K. Small, vice-president and director of congressional relations for the Securities Industry Association. That, coupled with the fact that "1980 is an election year," increases the "potential" that lawmakers might be tempted to go for a withholding bill as a relatively painless way of raising taxes without having to adopt a major increase.

Almost the entire US financial community -- representing banks, thrift institutions, securities dealers, and mutual funds -- is either adamantly opposed to the proposal or raises serious objections. "A lot of people, particularly many middle-age or retired people," are going to get "clobbered" if withholding takes effect, says an official of the Investment Company Institute, the main trade arm for the mutual fund industry.

The reason, the official argues, is that even though the final tax on dividends and interest earnings might be relatively small, a large amount, say $ 1,200 or more, might be withheld on many accounts. But that money would be refunded as a flat amount, without any compounding whatever.

Beyond the question of compounding, however, is another criticism, financial analysts say. That is that billions of dollars will be pulled from the investment stream annually at a time when the need for capital formation is considered vital for a US economy losing much of its former productivity.

In 1962, with prodigious lobbying by the Kennedy administration, the House voted for a 20 percent withholding rate. The Senate, howeveR, refused to accept the plan and has been the against the proposal ever since.

Most analysts here believe this latest withholding plan will again be scuttled. But because of the current need to balance the budget, there is a chance that withholding on dividends and interest will be a reality for taxpayers by next year.