The IRS proposal for withholding on interest and dividends has been haunting Capitol Hill since 1941.
Congress has already voted against it seven times, but the proposal never seems to go away. It's almost as if, somewhere deep in the bowels of the Treasury building, there's a troll who keeps the withholding idea alive to bubble up again any time an administration decides it needs to raise more tax revenue.
Last week, the Senate came within four votes of handing the IRS its eighth withholding defeat. Now the battle shifts to the House, where the Treasury Department will try to convince a majority of congressmen that the proposal is better this time around. It is not. After 41 years, the problems with withholding still remain. It would still discourage savings and investment, penalize the elderly and create an administrative nightmare.
The American people now save less than any other people in the Western world -- 5.6 percent of their income, compared with 14 percent in West Germany and 24 percent in Japan. Savings and investment are the keys to economic growth, and one of the best ways to turn our economy around would be to provide additional incentives for Americans to save. Instead, we are being asked to literally rob the saver of the benefits of interest compounding and automatic dividend reinvestment by removing 10 percent of the funds in the U.S. savings pool each year.
The Treasury Department expects to raise $4.3 billion from withholding in fiscal year 1983. Only about $1.3 billion of that comes from increased taxpayer compliance -- people paying taxes they should have been paying all along. The rest is, in reality, an interest-free loan from the American people to Uncle Sam. Instead of having that money in your saving account all year working for you, it will be sent off to the federal government. In other words, in order to get at the small percentage of taxpayers who fail to report their interest and dividend income, we are being asked to penalize nearly 90 percent of American taxpayers who have honestly paid their taxes all along.
And as a result, $3 billion will be taken out of the private capital market and will no longer be available for home mortgage loans, job creation or capital formation.
Withholding would hurt the low-income elderly most. Older Americans receive much of the dividend and interest income paid out to individuals in this country, but many rely on this money to make it from day to day -- to pay for food, heat, medical care, shelter. Losing 10 percent of their dividend and interest each month could force a noticeable change in the quality of their lives.
The Treasury Department has attempted to get around this problem by proposing an exemption procedure for the elderly and others who expect to have little tax liability. But it would be up to the individual to get hold of the exemption certificates and deliver them to his source of dividend or interest income. And every time he buys a piece of stock, opens a new savings account or puts his money in a new money market fund, an additional form would be required.
The American Association of Retired Persons strongly opposes withholding because, as they argue, "We fear the exemption process will frequently fail to operate properly and a serious overwithholding problem will result." They also point out that, by placing the burden on the individual to exempt himself, withholding would force many elderly people into the taxpaying system who have not been required to file for years.
Withholding would also create an administrative nightmare for banks, credit unions, savings and loans, brokerage firms and corporations nationwide. It would take at least nine months for those who have computers to do the reprogramming necessary, the start-up and operating costs would be huge, and no one is quite sure how to handle the more than 200 million exemption certificates that could be filed. Small be exempted for a year or two as well -- so they can set up the necessary paper work by hand -- but no one has addressed the competitive disadvantage that would be created when one bank in town starts taking money out of people's savings accounts and the other bank does not.
Now Congress is being asked to ignore all of this and vote withholding into law because "we need the revenue." That's the same argument Jimmy Carter used two years ago. It didn't work then, and it shouldn't work today.
The House of Representatives may not get a vote on withholding until the tax bill conference report comes up for final passage. But the American people will not be fooled by election-year attempts to shift the blame. They will remember that, in 1980, they voted to out the taxes on savings and investment and to get big government off their backs. Support for a bill that undermines those principles by requiring withholding will be hard to explain.
In the 41 years Congress has debated withholding, the inherent problems with the proposal have never been resolved. It's time for a vote that sends withholding back to the IRS graveyard, once and for all.