The budget agreement between President Bush and Congressional leaders calls for $5.3 billion in new taxes. With the president up to his lips in a no-tax pledge, lawmakers are understandably wondering where the money will come from. I have a suggestion: Re-enact the withholding for taxes due on dividend and interest payments.
Re-enact? That's right. Withholding was approved in the 1982 tax bill, only to be repealed later that year later (before it was implemented) under withering pressure from the banking industry. But now the arguments for the measure, always strong, are even more compelling.It would stanch a budget hemorrhage of about $3 billion in lost revenue each year, ease pressure to seek additional sources of money, bring cheaters to task and strengthen confidence in the tax system.
It would be neither a new tax nor an extra tax but merely an efficient method of collecting an existing tax. The major drawback - hardship for those, such as senior citizens or low-income people, who do not pay income taxes - is easily avoided by broad exemptions.
Withholding on dividends and interest is not a new idea. In fact, it dates back more than 125 years to our first income tax law, which helped finance the Civil War. Even in 1862, it was found practical and workable to withhold tax on dividends, interest and government salaries, although salaries in the private sector were felt beyond reasonable reach.
In 1943, the tables were reversed. Under the "pay-as-you-go" tax plan presented to Congress by Beardsley Ruml, then the chairman of R.H. Macy and Co., withholding was adopted on a permanent basis. But only wages and salaries were withheld, not dividends or interest. The plan helped bankroll World War II and became the backbone of our tax collection system. It continues today, raising almost $342 billion in 1988.
Why would Congress, having rejected the idea in 1982, turn around and pass a new withholding measure now? Because it was the right thing then and remains so.
With almost 1 trillion information documents filed with the Internal Revenue Service every year, the present reporting system is a costly and inadequate alternative. It merely identifies potential discrepancies between figures on tax returns and figures on documents.
Mismatches must be explained, and this requires follow-ups through correspondence, interviews and often official examinations at taxpayers' homes or offices. With more than 150 million returns filed annually, this procedure obviously can't be followed for every taxpayer.
American corporations wouldn't raise serious objections to withholding dividends and interest. Back in 1982, they seemed prepared to absorb the additional computer and bookkeeping costs. Banks, on the other hand, look at withholding as a threat to their deposit base. Instead of allowing interest-bearing accounts to grow without any intrusion, the new system would require banks to remit as withholding, say, 10 percent of the interest added to depositors' accounts.
Treasury Secretary Nicholas Brady recently suggested that President Bush's commitment to "no new taxes" left room to consider some "loophole" closing so as to strive for a better-balanced budget. Withholding does not fall even into the loophole category. Its function is simply to achieve compliance from taxpayers who either inadvertently or deliberately fail to meet tax obligations already in place.