Geithner Taxed by Kafka-Like Code, Should Fix It: Kevin Hassett

Commentary by Kevin Hassett

Jan. 20 (Bloomberg) -- There is one way to be sure that you are complying precisely with U.S. tax law: read the entire code. Problem is, it currently contains about 3.4 million words. That’s like reading “War and Peace” six times.

If you did spend the month that it would take the typical American to read the tax code, and somehow miraculously survived the ordeal, odds are that you might miss the following fun tidbit: If you are employed by the International Monetary Fund, then you have to act as if you are self-employed, and pay your own payroll tax.

While the IMF informs its employees of this special requirement, it and other similar institutions have not done a good job assuring compliance. Indeed, it is so common for employees of international organizations to incorrectly calculate, or evade, their self-employment taxes that, in 2007, the IRS offered a “one-time settlement initiative” for former and current employees. They were offered generous amnesty incentives in order to get “into compliance.”

That might have been the end of the story, except for President-elect Barack Obama’s decision to nominate Timothy Geithner as Treasury secretary. Geithner’s nomination found itself in neutral last week because he made the same error.

Geithner neglected to pay self-employment tax on his IMF income from 2001 to 2004. He was audited in 2006 for tax years 2003 and 2004 and paid back taxes of $12,719 in 2003 and $2,128 in 2004, plus $1,885 in interest payments. The IRS waived tax penalties for these years.

A Vetting Embarrassment

Geithner made similar mistakes in 2001 and 2002, and it was only during his recent vetting for the Obama appointment that he paid $25,970 in taxes and interest for those years.

Since Treasury oversees the Internal Revenue Service, it is certainly an embarrassment for Geithner that he neglected to pay taxes. Such an error should disqualify him for political appointment only if it was intentional, and two bits of evidence do suggest it wasn’t a mistake.

First, IMF employees are given ample notification of their responsibility. Geithner even signed a “Tax Allowance Application,” which confirmed that he wished “to apply for tax allowance of U.S. Federal and State income taxes and the difference between the ‘self-employed’ and ‘employed’ obligation of the U.S. Social Security tax which I will pay on my Fund income.” So his claim of innocence means he was willing to sign a document without reading it.

Second, Geithner knew after his audit in 2006 that he had made the same mistake in previous years, but he only paid up when he was nominated to be Treasury secretary. Some have pointed to this as a sign that he intended to avoid the tax.

Made Correct Call

But it turns out that Geithner probably made the correct judgment in this case. While there is no statute of limitations for tax fraud, the IRS only audits tax returns going back three years. If you made a mistake four years ago, the case is considered closed. It is likely that the IRS auditor told Geithner he wasn’t responsible for the previous mistakes at the time of his audit. He really didn’t need to pay up for 2001 and 2002, except to manage appearances.

So in the end, Geithner’s only real problem is that he signed a paper that informed him that he had to pay self- employment tax, and then didn’t do so. Such a mistake is so plausibly innocent that the IRS itself didn’t impose a penalty on him. (As a result of recent scrutiny by the Senate Finance Committee, Geithner paid additional tax of $4,334 and interest of $1,232 for other errors.)

For me, this tax episode is more reason to support Geithner, not less. I would rather have a person running the IRS who has an appreciation of how Kafkaesque our tax system and its enforcement bureaucracy can be. There probably has never been a Treasury secretary more motivated to simplify the tax code.

Legitimate Policy Concerns

There are legitimate concerns about Geithner. He has been president of the New York Federal Reserve for the past five years. The New York Fed’s primary role is to be the U.S. government’s eyes and ears in financial markets. And yet the carnage that we have seen this year has taken us totally by surprise. The eyes and ears failed us.

It wouldn’t have made sense to promote the man in charge of Hawaiian reconnaissance to be supreme allied commander after Pearl Harbor. Appointing Geithner to Treasury is a similar jump.

Obama’s nominee should have to answer tough questions about his previous failures -- the policy ones, not the personal ones - - before he is confirmed. How is it that Wall Street as we knew it ended on his watch? What did he do wrong? And how can we be sure that he will not do for America what he did for Wall Street?

Americans deserve answers to these questions. They will only get them if everyone agrees before his confirmation that his tax problems are a sideshow.