Geithner’s Tax Problem (Updated)

The Obama transition team’s latest stumble is the revelation that Treasury Secretary nominee Tim Geithner failed to pay self-employment taxes from 2001 through 2004, when he was employed by the International Monetary Fund.

This is, as the Obama camp has pointed out, a rather common error. Most people are employees, and are used to the system where they pay one-half of their Social Security and Medicare taxes and their employee pays the other half. (Actually the employee pays both halves; the employer just mails in half to the government. But that’s another story.) If, like me, you are self-employed, there is no employer to send in half, so you pay the whole thing yourself. What is unusual about Geithner’s situation is that he wasn’t self-employed; however, the IMF for some reason doesn’t mail in half of FICA taxes, so its employees are responsible for the whole amount. This is an obscure provision of the law, but it shouldn’t be all that obscure if you are working for the IMF over a period of years.

Some have gone overboard by calling Geithner a “tax cheat.” It is inconceivable that the error was intentional. Others have used the occasion to call for tax simplification. I am all in favor of tax simplification, but the issue at hand isn’t all that complicated: payment of self-employment taxes is elementary, and the fact that an IMF employee is “self-employed” for this purpose, while obscure to the general public, ought to be known to IMF’s employees.

I don’t draw any conclusion from this episode other than that Geithner is a busy guy who, like many others, hasn’t paid enough attention to his personal tax and financial matters. The errors apparently occurred both in years when Geithner prepared his own income taxes–a mistake, to say the least–and in years when they were done by a tax preparer. This error–like the fact that the Geithners’ housekeeper’s employment authorization expired while she was still working for them–is of minor importance except in the unique circumstance when someone is nominated to high office. If I were on the Senate committee that will hold a hearing on Geithner’s nomination, my questioning would focus on his role, as head of the New York Fed, in the financial crisis that has been brewing, mainly in New York, for some years, and on his role in the bailouts that have already been orchestrated, not on his taxes or his housekeeper.

One wonders, though, what it will take for the press to begin acknowledging that the Obama administration’s transition has been not unusually smooth, but relatively rocky.

UPDATE: Additional facts have come to light that make this situation much more serious. Byron York reports that IMF employees received additional compensation that was earmarked for their portion of FICA taxes. Their incomes were, as the IMF put it, “grossed up.” Thus, Geithner accepted “reimbursement” from the IMF for taxes that he didn’t pay. Not only that, he certified that he would pay the taxes:

The IMF did not withhold state and federal income taxes or self-employment taxes — Social Security and Medicare — from its employees’ paychecks. But the IMF took great care to explain to those employees, in detail and frequently, what their tax responsibilities were. …

The tax allowance has turned out to be a key part of the Geithner situation. This is how it worked. IMF employees were expected to pay their taxes out of their own money. But the IMF then gave them an extra allowance, known as a “gross-up,” to cover those tax payments. This was done in the Annual Tax Allowance Request, in which the employee filled out some basic information — marital status, dependent children, etc. — and the IMF then estimated the amount of taxes the employee would owe and gave the employee a corresponding allowance.

At the end of the tax allowance form were the words, “I hereby certify that all the information contained herein is true to the best of my knowledge and belief and that I will pay the taxes for which I have received tax allowance payments from the Fund.” Geithner signed the form. He accepted the allowance payment. He didn’t pay the tax. For several years in a row.

I’m still sure it’s carelessness, not fraud, but if Byron’s description is correct (and I’m confident it is), it represents a level of carelessness that is not going to be tolerated in a Treasury Secretary at this moment in history. I expect Obama to withdraw Geithner’s nomination.

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