Can a contractor withhold partial payment on every paycheck from a subcontractor?

If you agreed to this--and if you are truly a contractor (see below)--it is legal: contractors can essentially contract to any agreements, arrangements, compensation schemes, etc. they mutually consent to. Note that you can consent, as a contractor, to a certain arrangement by continuing to do work after being told what the terms of the relationship are; by working after knowing, for example, that 25% of pay will be withheld against future "damages," you have shown you agree to that. 
However, the above is because contractor  have *much* less protection than employees have. If you were an employee, your employer could not deduct *anything* from your pay without your expressed or explicit consent to it (or as required by law; e.g. court order wage garnishment). The law does not allow deductions from paychecks without explicit employee consents.
So the real question is: are you truly a contractor?Or should you be considered (and paid as) an employee? It does not matter what the employer wants to consider you: all that matters is what you are considered under the law.
You can find the rules for when someone is or is not a contractor (as opposed to an employee) on the U.S. Dept. of Labor website. In brief an independent contractor (or subcontactor) has a high degree of "independence" from his/her employer. Conversely, if your job is controlled by your employer, you are likely an employee. So if your employer determines the hours you work, the location(s) you work, can tell you not just what to do but how to do you job, etc., you are most likely an employee, not a contractor or subcontractor. If an employee, not only should your employer not be taking money from your paycheck, but you  may be entitled to overtime; may be entitled to benefits; the employer should pay the employer portion of social security and medicare taxes, etc. If you feel you have been misclassified as a contractor when you are really an employee, contact the department of labor to file a complaint.