THE REAGAN administration proposed this week to step up action against people who cheat on their income taxes. Tax return auditing would be increased, and a new withholding requirement would make it harder for people to conceal the income they get from interest and stock dividends. This should be welcome news not only for the Treasury--which loses upwards of $25 billion a year to tax cheats--but also for all the honest taxpayers who pay higher taxes as a result.

Most people in this country pay their taxes honestly and promptly. They don't have much choice about it. Most or all of their income is wage or salary payments, and the law requires employers to withhold taxes from paychecks and forward the receipts directly to the Treasury. People who cheat on taxes tend, as you might guess, to be those with the best opportunity--the self-employed, the illegally engaged, the manipulators of tax shelters and the recipients of investment income.

This last group of tax evaders--people who fail to report interest and dividends--now probably cheats the Treasury out of more than $3 billion a year. The administration proposes to collect at least part of this amount by requiring savings and loans, banks and corporations to withhold 5 percent from interest and dividend checks and send it directly to the Treasury. The plan is cautious in several respects.

To make sure that old people with modest incomes are not inconvenienced by the new withholding, an exemption is planned for elderly taxpayers with incomes as high as $15,000. The proposed withholding rate is also very modest since most recipients of interest and dividends face tax rates far higher than 5 percent. But the fact that a record of their receipts is being sent to the Treasury is likely to encourage most taxpayers to make a full accounting on their tax returns--particularly since they now face a 20 percent interest charge on delinquent tax payments and possibly a fraud penalty as well.

The savings and loan lobby has already greeted this proposal with shrieks of alarm. Withholding, they argue, will be a major administrative burden and will also discourage the deposits that S&Ls sorely need. The administrative argument--whatever its merits when withholding was first considered by Congress-- can no longer be treated seriously. Payers of dividends and interest are already required to file annual taxpayer information reports, and thanks to modern automation, these institutions routinely perform miracles of electronic accounting that make filing quarterly tax returns look like child's play.

The savings institutions would miss the 5 percent of interest accruals they would have to send to the government, and they might even lose a few depositors lured only by the chance of tax evasion. But there is no justification for condoning cheating in order to prop up failing financial institutions.