Bankers and savings and loan executives are starting to savor success on Capitol Hill. They are on the verge of winning a classic confrontation between government and business by forcing Congress to repeal the law to withhold income taxes from dividends and interest payments starting July 1.
Enough senators and representatives have signed on as cosponsors of the bankers' withholding repeal bill to virtually assure that if there is ever a floor vote on the measure, withholding is dead. Before the bankers call in their chits, they ought to take a look at the bumpers on some 1983 cars and ponder the price of victory.
If Congress backs down on withholding taxes on dividends and interest it will be the biggest business victory in Washington since the auto industry killed the requirement that car bumpers survive a 5 mph crash.
The automakers' clamour for weaker bumpers and the bankers' outraged response to withholding show what happens when business unleashes its clout without regard to the consequences. Using doomsday weapons against dubious threats could produce fallout that's more dangerous than the enemy.
The 5 mph bumper standard bit the dust last June. But the awesome cost to consumers of the auto industry's victory is only now becoming evident. Consider these figures put out last week by the Insurance Institute for Highway Safety, an organization of car insurance companies:
A driver whose 1982 Honda Accord ran into a barrier at 5 miles an hour could drive away with unblemished bumpers, but the flimsier front bumper on a 1983 Accord would cost $299 to fix after the same accident, Insurance Institute researchers said.
Back into a pole at 5 mph while driving a Plymouth Horizon with bumpers that met the old standards and you could drive away unscathed. Make the same mistake in a new Horizon and it'll cost you $193 for repairs. Car owners "will pay higher insurance premiums to reflect the poorer bumper performance," the insurance companies warn.
Cutting the bumper crash standard from 5 mph to 2 1/2 mph was supposed to save consumers money by eliminating the costly crash-control devices and to provide better gas mileage by making cars lighter in weight, the automakers promised.
But not one car manufacturer has cut prices after switching to weaker bumpers, the Insurance Institute says. The weight savings turns out to mean a gas savings of about 25 cents a year (0.2 gallons of gas) for the Plymouth Horizon and a whopping 1.8 gallons of gas a year for an Accord owner. For $2 worth of gas a year, Honda buyers run the risk of a $299 bumper repair bill, thanks to the car companies' "victory."
The auto makers not only socked it to their own customers by weakening their bumpers, they also burned some of their best friends in the process. Sen. John Danforth (R-Mo.) calls the weakened bumper standard "fraudulent" and he is not exactly an enemy of big business.
It is another moderate Midwestern Republican, Bob Dole of Kansas, who is bristling from the bankers' heat on the dividend and interest withholding bill. Dole is no tax-the-rich reformer; he wants to cut the holding period on capital gains from a year to six months and wants to do away with double taxation of corporate dividends.
Dole told the bankers to their faces last Thursday that they are using dishonest, deliberately misleading arguments against the withholding plan.
"The tactics used by many banks, savings and loans and credit unions have reached an historic low," he told an American Bankers Association group. It's one thing to argue against a measure you don't like and quite another to twist the truth, Dole complained.
Any group that wants to influence public policy--especially bankers--"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."
In advertisements and statement-stuffers included with returned checks, the banks have been warning customers they stand to lose interest income because of the law requiring that 10 percent of interest payments be withheld for federal taxes. Withholding taxes will reduce the compound interest income customers earn, the banks warn.
By Dole's calculations, the compounding loss due to withholding turns out to be about as significant as the gas savings from weaker bumpers. On a $1,000 savings account, earning 9 percent interest a year, the difference is less than 50 cents.
There will be no compounding loss at all, Dole points out, if the banks chose to withhold taxes only at the end of the year, as the law permits. Banks are likely to withhold quarterly or monthly, however, because that will enable them to earn interest on money taken out of savers' accounts. In other words, says Dole, if you lose compound interest because of withholding, don't blame me, blame your banker.
Dole's remarks make clear that, like the automakers, the banking industry has already alienated its natural allies by pushing imprudently for self-interest legislation. And now, like the automakers, the banks run the risk of infuriating their customers.
It is the banks, not their depositers, who will benefit from killing interest withholding, just as it was the automakers, not drivers, who benefit from flimsy bumpers. The banks will be in as embarrassing a position as the auto industry once the customers figure that out.