The Post's Feb. 21 editorial defending the 10 percent withholding tax on interest and dividend income asks: "What's so wrong with asking people to pay their taxes?" The answer, of course, is nothing at all. As a matter of fact, the Treasury Department reports that 89 percent of the American people already do.

And that, in a nutshell, is the problem with withholding. Instead of going after the small percentage of Americans who actually fail to pay their taxes on interest and dividends, the IRS wants to penalize law-abiding savers across the country by requiring that 10 percent of all interest and dividend income be withheld. The Treasury Department estimates a fiscal year 1984 revenue gain of $5 billion from withholding. Of that, $3 billion comes from increased compliance--people paying taxes they should have been paying all along.

The Post correctly points out that "Banks already send quarterly information forms to the IRS on all dividends and interest." Why doesn't the government use the information it already has to crack down on tax evaders? A recent IRS study shows that an improved information reporting system could increase taxpayer compliance to 97 percent. The compliance reforms passed in last summer's tax bill, together with a requirement that the IRS cross check 1099 forms with every tax return, would go a long way toward solving any compliance problem that now exists.

If withholding goes into effect, the set- up costs to financial institutions could be as high as $3 billion. Shouldn't we at least attempt to improve compliance with the information we already have before imposing withholding on the nearly 90 percent of American taxpayers who have honestly paid their taxes all along?

The Post is mistaken, as well, when it states that, "the new law will put no burden on any honest taxpayer . . . people who are elderly or have modest incomes are exempt." Yet, what happens to the person who just retired or lost his job? Won't money be withheld from his savings despite the fact that he has little or no money coming in, because the tax is based on last year's income?

What about the senior citizens who miss filing for an exemption because they didn't know they had to file or were physically unable to do so? Won't they have to wait a year and go through the hassle of filing an income tax return to get their money back? A large percentage of all interest- and dividend-earning accounts belong to the elderly, and many rely on this income to make it from day to day--to pay for food, heat, medical care, shelter.

Being exempt from withholding doesn't mean you're exempt from the hassles it will cause. It's up to the individual to get hold of the exemption certificates and file them for each source of dividend or interest income he has. And every time he buys a piece of stock, opens a new savings account or puts his money in a money market fund, a new form will be required.

Congress, sensitive to the problems withholding would cause for small savers, tried to exempt all accounts earning $150 a year or less. Yet the exemption is optional--it's up to the banks whether to withhold on small accounts or not.

For example, a credit union could decide to review all its accounts at the end of the first quarter, see which ones earned more than $37.50 in interest income, and withhold on only those accounts. If so, the credit union would be forced to make a judgment call--and what if it is wrong? If it withholds on an account, and a large enough withdrawal is made in the second quarter to make that account exempt, it would be guilty of overwithholding. If it decides not to withhold, and an account that should have been withheld on is closed out, the bank itself is liable. Many banks will decide to avoid these pitfalls by forgoing the option and withholding on all accounts, large or small.

The same problem exists for regular savings accounts, interest-bearing checking accounts, new bank money market accounts, and Super-NOW checking accounts. On March 2, the Treasury Department announced that financial institutions will have the option of waiting until the end of the year to withhold on all such accounts. Yet, what if those accounts are closed out before the end of the year? The banks will still be liable for any money that should have been withheld. How many banks will take that chance and wait?

There are many serious problems with the new withholding law, and these problems are inherent--no amount of revised regulations will adequately address them.

Withholding has become an issue of the people, and the pressure for repeal will grow even stronger when savers and investors start to see 10 percent of their interest and dividend income withheld from their accounts and sent off to Uncle Sam. The campaign to repeal withholding will not stop if the law goes into effect in July. In fact, the opposition should be strongest one year from today, as taxpayers across the country file their tax returns, figure out where their money went and try to get it back.

The American people deserve a vote in Congress on withholding now, before the headaches of withholding really begin.