If there was ever any doubt about the political clout of the American banking community, it should be quickly put to rest by the remarkable political drama now taking place in Washington. In mounting a massive public campaign against the measure enacted by Congress last year requiring 10 percent withholding on interest and dividends beginning July 1, the industry has delayed enactment of a much-needed jobs bill, risked higher federal deficits, and directly challenged the authority of a conservative President who under most circumstances would be a logical ally of financial institutions.
The withholding provision was passed into law last year as part of the $100 billion tax reform measure designed to reduce future budget deficits.
Withholding was but a small part of that package. But it was seen as fair and useful because it addressed the issue of tax cheating: by targeting individuals who underreport interest and dividend income. The US Treasury contends that in 1981 alone the government lost $8.2 billion in taxes that should have been collected on dividends and interest but was not collected because the income was never reported. By requiring financial institutions to withhold automatically 10 percent on such income, it was felt, much greater compliance would be enforced.
Proponents of repeal argue that the withholding measure would injure millions of individuals, discourage savings and investment, and create added costs for banks. But are such claims valid? Withholding is hardly a novel concept. The government has been withholding tax dollars on wages and salaries since World War II.
Further, thanks to a wide-ranging number of exemptions, most people who have special need for the interest or dividend income would be exempt from withholding. To mention just a few exemptions: persons over 65 years of age; persons whose interest is less than $150; persons whose prior year's tax bill was less than $600. Claiming an exemption is also easy. A person would merely file a W-6 form once for each institution - filling in name, address, social security number, and account number.
In regard to operating costs for the financial institutions, the Treasury has said that it would allow such institutions the option of withholding taxes on money market accounts and ''super'' NOW accounts only once a year, rather than monthly or quarterly. That option already applies to passbook savings accounts and interest-bearing checking accounts. Banks, it might be recalled, already file 1099 forms on persons earning interest payments.
Only time will tell whether the withholding measure creates more problems than it is intended to solve. But since its objective is to help bring about greater compliance with the tax code, and to reduce deficits, lawmakers would do well to go ahead with the plan as scheduled. If withholding proves too unwieldy or wasteful, it can be revoked at a later time.