Bankers and funds fire away at plan to withhold dividends

Congress's proposal to require 10 percent of all interest and dividend payments to be withheld for passing on to the federal government is creating more than a storm in the financial world. Maybe a hurricane or typhoon is a more appropriate word.

Listen to Harry Brown, chairman of the Reserve Fund, a money-market mutual fund: ''This is going to be a nightmare . . . . It will be a monster trying to change the computer programs.''

Or listen to Saul Klamen, president of the National Association of Mutual Savings Banks: ''It will be a morass to do this. It will cost billions.''

But Thomas F. Field, of Tax Notes, a Washington, D.C., tax report, says the measure would only cost the banks, thrifts, and corporations ''a little more typewriter ribbon on their computers.'' He says these institutions have since 1962 been reporting to the Internal Revenue Service and their customers on dividends and interest payments in a Form 1099. He adds that the banks and thrifts are upset at the prospect of losing the withheld interest income from their balance sheets.

What Mr. Klamen and Mr. Brown are objecting to is a proposal that has already cleared the Senate and is part of the tax bill being hammered out in a Senate-House conference. It requires that 10 percent of all interest and dividends paid to individuals be withheld, much as income taxes on wages and salaries are withheld. So far, Congress has exempted individuals aged 65 and over whose tax liability is less than $1,500 on a single return or $2,500 on a joint return; individuals under age 65 but whose income tax liabilty is less than $1,000 for a joint return; anyone who receives less than $100 a year in interest or dividends from an institution; and very small savings institutions for which it would cause problems.

In an effort to head off passage of the bill, the American Bankers Association sent telegrams this week to every member of Congress, asking them not to vote for it. And a select group of banking and mutual fund executives met last week with President Reagan in the White House in an unsuccessful effort to try to persuade him to drop the measure. Opponents of the bill now admit it looks as if it will pass, since the Treasury estimates the proposal will add about $4.3 billion to 1983 revenue.

What it will add in the way of cost to the institutions that must comply with the regulation is another matter. The United States League of Savings Associations estimates compliance would cost its members $350 million. And Mr. Klamen says his organization figures it would cost $1 to $2.50 per account per year. There are 37 million accounts in savings institutions.

Matt Fink of the Investment Company Institute says his organization estimates the requirement would add $1.50 to $2 to the annual cost of servicing each mutual fund account and that the initial cost to the industry would be $36 million.

Mr. Brown of the Reserve Fund says it will cost his institution $500,000 to reprogram its computers. And in a recent meeting with the Treasury, Citibank estimated the change would cost $600,000, plus annual charges of $2 to $4 per account.

Probably the biggest cost will be borne by the banks that act as transfer agents, sending out a major portion of the $150 billion in interest and dividend income earned by stocks, bonds, mutual funds, or other such investments each year. Needless to say, all these institutions will try their hardest to pass this cost on to the consumer.

The Treasury, in an effort to help defer some of this expense, has decided to allow the institutions to place the sum withheld - which would be about $15 billion annually - in escrow accounts. The institutions would be able to collect interest on the money they withhold.

There are some costs that couldn't be passed on, however. For example, Mr. Klamen complains that withholding the money would mean the beleaguered thrifts would lose even more deposits. Last year, the mutual savings banks had $14 billion in interest. Thus, the banks would lose some $1.4 billion in deposits, based on the 10 percent withholding. Even though individuals would get some of this back in the way of refunds, there would be a long lag period before it was redeposited.

Thomas Parliment, an economist with the US League, says one of the league's main objections is added costs to the depositor. ''It will raise the cost of having an account,'' he says, ''and may mean people will have to keep higher minimum balances, or pay additional service charges.''

Also, since individuals who are exempt from withholding must fill out an exemption form every time they roll over a deposit or change a savings account, he says it would result in a flood of paper work. Manufacturers Hanover Trust, in fact, told the Treasury that it estimated it would be handling some 3 million certificates of exemption each year. Mr. Parliment says this could result in greater invasion of privacy, particularly for customers in small towns who must disclose their tax or income status when they fill out the certificates of exemption.

The securities industry is not opposed to the bill. A spokeswoman in New York says the Securities Industry Association agreed to support the legislation in exchange for Congress's lowering the long-term capital gains period from 12 months to 6 months. And the insurance industry, which pays out billions of dollars in interest dividends each year, did not object to the bill, one source says, since it, too, received favorable treatment in the tax bill.

The American Bankers Association, which is making a last-ditch effort to change or scrap the legislation before it gets to the White House, says that philosophically it finds it difficult to understand the reason for the legislation. ''Historically, people have been very good at paying taxes on interest,'' a spokesman claims, ''and part of the President's economic program has been aimed at increasing savings. Now, the saver is going to be penalized.''