Instead of the Buffett Rule, How About the Geithner Rule?

President Obama has now admitted that the “Buffett Rule,” formerly the centerpiece of his re-election campaign, is a silly gimmick that will raise hardly any money for the treasury. (Actually, it might cost the federal government money, as increases in the capital gains rate have been known to do.) So how about if, instead, we start talking about the Geithner Rule, which is: everyone pays what he owes under existing laws?

Start with the fact that as far as we know, Warren Buffett pays all the personal income taxes he owes, as do Mitt Romney and Barack Obama. Unlike these individuals, there are a great many Americans who don’t pay what they owe. The IRS estimates that year in and year out, around 15% of what Americans owe in taxes isn’t paid. This is mostly due to under-reporting of income. For FY 2011, the IRS collected around $2.3 trillion in tax revenue. Fifteen percent of that amount is $345 billion. Here, unlike the Buffett Rule, we are talking about real money.

Most tax evaders don’t wind up in prison. In fact, some wind up working for the government. Take Tim Geithner. Geithner, Obama’s Secretary of the Treasury, is a tax cheat. When he worked for the International Monetary Fund, the fund did not pay withholding taxes on his income, but rather paid Geithner a specifically-designated additional amount which Geithner was supposed to use to pay self-employment taxes. Geithner kept that money, but didn’t pay the taxes. Byron York explains:

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. First, each employee was given the IMF Employee Tax Manual. Then, employees were given quarterly wage statements for the specific purpose of calculating taxes. Then, they were given year-end wage statements. And then, each IMF employee was required to file what was known as an Annual Tax Allowance Request. Geithner received all those documents.

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.

When the IRS audited Geithner, he paid what he owed for 2003 and 2004. But he didn’t pay what he owed for 2001 and 2002. Why? Because the statute of limitations had run on those years, so the IRS couldn’t sue him to collect the money or charge him criminally for failing to pay it. Only when he was nominated as Secretary of the Treasury did Geithner go back and pay what he owed for 2001 and 2002.

Geithner is not the only tax cheat working in the Obama administration. As Glenn Reynolds has pointed out repeatedly, no fewer than 41 of Obama’s White House aides owe back taxes to the IRS, adding up to $831,000. But they aren’t alone: 638 Congressional staffers owe another $9.3 million, and federal employees, altogether, owe $1 billion in back taxes.

Private sector employees and companies don’t always pay their taxes, either. Warren Buffett may be eager to pay more in personal income taxes–not that he is actually mailing any checks to the treasury–but his company, Berkshire Hathaway, is embroiled in long-running battle over its IRS tab. Experts Berkshire Hathaway may owe an additional $1 billion.

So instead of wasting time on the Buffett Rule, how about if we promote the Geithner Rule, i.e., everyone pays what he owes under existing law. This will certainly promote fairness; is anyone in favor of tax evasion? And, unlike the Buffett Rule, if Tim Geithner, Berkshire Hathaway, Obama’s White House, and everyone else pays what they owe, it will go a long way toward solving the nation’s fiscal crisis.

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