Scofflaw Geithner sets a poor example

Treasury Secretary-designate Timothy Geithner gestures while testifying on Capitol Hill in Washington, Wednesday, Jan. 21, 2009, before the Senate Finance Committee hearing on his nomination. (AP Photo/Pablo Martinez Monsivais) less Treasury Secretary-designate Timothy Geithner gestures while testifying on Capitol Hill in Washington, Wednesday, Jan. 21, 2009, before the Senate Finance Committee hearing on his nomination. (AP Photo/Pablo ... more Photo: Pablo Martinez Monsivais, AP Photo: Pablo Martinez Monsivais, AP Image 1 of / 1 Caption Close Scofflaw Geithner sets a poor example 1 / 1 Back to Gallery

In his inauguration speech, President Obama singled out "honesty and hard work, courage and fair play, tolerance and patriotism" as "those values upon which our success depends."

So why did Obama nominate a tax scofflaw to head the U.S. Treasury, which oversees the Internal Revenue Service?

In a confirmation hearing Wednesday, the Senate Finance Committee grilled Timothy Geithner, Obama's pick for Treasury secretary, about his tax problems and the nation's dire financial situation. The committee could vote on his nomination today with a vote by the full Senate coming next week.

The tax issue: Geithner, who now heads the Federal Reserve Bank of New York, failed to pay Social Security and Medicare taxes when they were due on income he received from the International Monetary Fund between 2001 and 2004.

Geithner was a regular employee of the IMF, but because it is an international organization, it is not required to withhold Social Security and Medicare tax from worker paychecks.

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Instead, IMF employees are required to pay these taxes on their own, as if they are self-employed. They must pay both the employer's and the employee's share, which adds up to 15.3 percent of wages.

The IMF reimburses them for the employer's half, but makes it clear that employees must pay the full amount.

The IMF goes to "great lengths" to make sure employees comply with their U.S. tax obligations, Sen Jim Bunning, R-Ky., said Wednesday.

Audit shows errors

Geithner acknowledged receiving the tax reimbursement, but paid no self-employment tax for 2001 through 2004.

In 2006, he was audited for 2003 and 2004 and agreed to pay $16,732 in back self-employment taxes plus interest, according to a Finance Committee document. Penalties were waived. The audit uncovered a few other errors he had made.

Tax experts say the IRS probably didn't look at his earlier returns because it generally has three years from the date a return is filed to audit it unless fraud is involved.

After the election, when he surfaced as a candidate for Treasury secretary, Geithner paid $25,970 in back taxes and interest for 2001 and 2002. Obama's staff told senators about it Dec. 5.

Obama has said Geithner made an "innocent mistake."

Geithner said he did his own taxes using TurboTax in 2001 and 2002. For 2003 and 2004, he used an accountant who told him he didn't owe self-employment taxes. But he took responsibility for the errors Wednesday.

They were "careless mistakes, avoidable mistakes, but they were unintentional. I should have been more careful. I take full responsibility for them. I have gone back and corrected the errors; I have paid what I owed," he said.

If Geithner was being considered to head the Agriculture Department, it might be easier to understand or overlook his tax errors.

But the duties of the Treasury Department, according to its Web site, include: managing federal finances; collecting taxes and paying bills; managing the public debt; supervising national banks; advising on financial, monetary, economic, trade and tax policy; enforcing federal finance and tax laws; along with investigating and prosecuting tax evaders, counterfeiters, and forgers.

If Geithner can't do his taxes right, how can he expect others to?

IRS Taxpayer Advocate Nina Olson has complained for years about the tax code's complexity. In her annual report to Congress this year, she called it the top problem facing taxpayers.

But paying self-employment tax is not one of the more arcane parts of the code. "The complexity of the law could not be the contributing factor (in Geithner's case). We are talking about a pretty financially savvy person," says Robert Willens, a tax consultant to Wall Street firms.

Yet Willens predicts Geithner will be confirmed because it would be dangerous to be without a Treasury secretary right now. "In these times, I certainly am willing to overlook it because the markets do have confidence in him as a policymaker," he said.

David Kotok, chief investment officer with Cumberland Advisors, does not think Geithner should be confirmed, but thinks that he will be.

"I don't believe there is only one person in the country who is the person for this job," he said. "They had time to consider others. That is what bothered me. The president was prepared for the criticism and endorsed him."

He points out that Zoe Baird and Kimba Wood - Bill Clinton's first two nominees for attorney general in 1993 - were forced to withdraw from consideration because they had employed undocumented nannies. Unlike Baird, Wood paid Social Security tax on her nanny and hired her at a time when it was not illegal to do so.

It's not 'pay when caught'

I believe that hiring a man who failed to do his taxes right will set a terrible example. Our tax system is built on the premise of pay when due, not pay when caught.

In 2007, Olson told Congress, "Noncompliance has a corrosive effect on tax compliance. If compliant taxpayers believe that everyone else is paying his or her fair share, they are likely to remain compliant. But no one wants to feel like a 'tax chump.' If compliant taxpayers feel like they are overpaying, some will reach a point where they resent it and stop complying or comply at a lower level."

If Obama wants to borrow hundreds of billions of dollars for a stimulus plan, our nation is going to need every possible tax dollar to pay it back.