A poor tax proposal
It is no wonder there is some bemusement among the Republican members of the House Ways and Means Committee about economic policies. Consider the administration's new proposal to impose a 5 percent withholding tax on interest and dividend payments. By seeking such a withholding tax -- similiar to the withholding tax now in effect on personal wages --the supply-side Reagan administration would be scooping up billions of dollars for the US Treasury that would otherwise presumably enter the savings and investment flow during the course of the tax year. The contradiction has apparently not been lost on lawmakers.''We had a meeting of the 12 Ways and Means Republicans,'' said committee member John Rousselot, ''and there wasn't one vote for it.''
A withholding proposal has come before Congress twice before and was rejected both times. Critics will no doubt take delight in noting that one of the most outspoken critics in the past was Donald Regan, who is now President Reagan's Treasury secretary. Mr. Regan now calls the withholding proposal an ''enforcement measure,'' as opposed to a ''tax.'' To be sure, the Reagan administration, like the Carter administration before it, has legitimate grounds for seeking withholding, given the billions of dollars in both dividend and interest earnings that go unreported each year. But the question is whether withholding a percentage of such earnings, which will require adding some 5,000 IRS agents to improve auditing and tax-collecting, is the best way to raise more tax revenue. The administration has totally ignored such alternative ''enhancement'' measures as limiting the amount of credit-interest deductions available to taxpayers.
Failing to report as well as pay the proper taxes on dividends and interests is inexcusable. The IRS should crack down on such violations, a task now facilitated by the computerizing of ''1099 forms,'' the forms filed to the government by banks and corporations reporting dividend and interest payments, and their matchup with individual tax returns. But before lawmakers go the withholding route they need to ensure that the loss to savings and banking institutions (estimated in the billions of dollars) would not be so severe as to endanger them. They also need to ensure that corporations would not be injured by a falloff in reinvestment rates. One effect of that might be to force more firms out into the capital market searching for loans - and that, in turn, would put new upward pressure on interest rates.
In short, the administration's withholding plan would not seem to be an ideal candidate for hasty legislative enactment.