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January 15, 2009

NY TimesWatch: Geithner, Media Lies, and Accountability

Between being sick and being unusually busy at work I haven't been paying all that much attention to the news lately, so I've just started catching up to this business about Tim Geithner and his back taxes. While I'm not a fan of partisan witch hunts or gotcha politics, the determined media airbrushing on this one is getting a bit hard to swallow. The headline on this NYT article is just priceless:

"Geithner’s Skill May Trump Tax Issue"

His skill at what? Managing his taxes? Reading the Times, at times, requires a nearly superhuman patience. In the land of the flexible urban viewpoint, the nation can ill afford not to confirm Tim Geithner because any man smart enough to line his own pockets with the up front reimbursement paid to him each quarter by his employer is the very man we desperately need watching over the administration of billions of dollars worth of bailout funds.

*cough* OK. That wasn't terribly convincing, was it?

Let's try that one again. Any man who "didn't notice" he had to pay Social Security and Medicare taxes.... err... who "made a common mistake" that entailed ignoring his the quarterly notifications sent to him by his employer, warning him against this very mistake (not to mention pocketing quarterly reimbursement checks sent to him to indemnify him for this very expense - what in heck did he think he was being "reimbursed" for???).... is so "brilliant" that America cannot afford to dispense with his services.

*cough*

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.

According to an analysis released by the Senate Finance Committee, Geithner “wrote contemporaneous checks to the IRS and the State of Maryland for estimated [income] tax payments” that jibed exactly with his IMF statements. But he didn’t write checks for the self-employment tax allowance. Then, according to the committee analysis, “he filled out, signed and submitted an annual tax allowance request worksheet with the IMF that states, ‘I wish 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.”

In a conversation today with sources on Capitol Hill who are familiar with the situation, I asked, “Was Geithner made whole for tax payments that he didn’t make?”

“Yes,” one source answered. “He was getting the money. He was being paid a tax allowance to pay him for tax payments that he should have made but had not.”

I suppose this is one of those situations where it all depends upon the meaning of the words "skill", "afford", and "mistake".

All of this information is in the public record. Now let's see how the New York Times chooses to describe the exact same series of events:

If Timothy F. Geithner were a bank, he might well be considered “too big to fail.” [Ed. note: And that phrase just conjures up all sorts of happy endings, doesn't it?]

In better economic times, Mr. Geithner’s confirmation to be President-elect Barack Obama’s Treasury secretary might be in danger after the disclosure this week that he had paid more than $48,000 in delinquent taxes and interest. But with the economy so fragile, many senators are loath to rattle financial markets by rejecting someone with Mr. Geithner’s qualifications and international respect. By late Wednesday, Republicans as well as Democrats were predicting he would survive the controversy and be confirmed next week.

Mr. Geithner has broad experience in global economics, financial regulation, currency and monetary policy. And lately, as president of the Federal Reserve Bank of New York, he has been at the center of the government’s efforts to manage the financial chaos, sharing some criticism for its mixed record but not blame.

“These are not the times to think in small political terms,” said Senator Lindsey Graham, Republican of South Carolina, who just returned from Afghanistan and Pakistan with Vice President-elect Joseph R. Biden Jr., and briefly met with reporters on Wednesday alongside Mr. Obama. “I think he is the right guy.”

Mr. Graham thereby validated what the president-elect had just said: That Mr. Geithner, by bipartisan agreement, is “uniquely qualified.”

“Look, is this an embarrassment for him? Yes. He said so himself,” Mr. Obama said, referring to Mr. Geithner’s remarks in a private meeting with the Senate Finance Committee the day before. But Mr. Obama said Mr. Geithner had made a common mistake and corrected it.

The committee chairman, Senator Max Baucus, Democrat of Montana, early Wednesday postponed Mr. Geithner’s confirmation hearing from Friday to the day after the inauguration. Senators said the delay was unrelated to the tax issue, but at least for a time it will leave Mr. Obama without a Treasury secretary.

The panel’s senior Republican, Senator Charles E. Grassley of Iowa, declined for a second day to take a position on Mr. Geithner’s nomination. In an interview with Iowa reporters, Mr. Grassley reiterated his concern about having a Treasury secretary, with responsibility for the Internal Revenue Service, who had been delinquent on taxes. But he said Mr. Geithner had been “very sincere” in accounting for his violations.

He added: “I don’t believe there’s any doubt about his qualifications. For a partisan person like Obama, appointing a relative political independent as Geithner is, I think that that’s a plus.”

Mr. Geithner called other senators to discuss the controversy, if they wanted, as well as his views on the big issues that otherwise had been expected to dominate his confirmation hearing: an emerging $800 billion economic recovery blueprint, plans for the remaining half of a $700 billion financial bailout fund, and ideas for rewriting regulations for the nation’s financial system to avoid another collapse.

The controversy over his taxes, as it happens, goes to the one area where Mr. Geithner has the least experience, despite serving 13 years at the Treasury Department: domestic tax policy.

Allow me to make a few observations about the rather astonishing disparity in the way the National Review and the New York Times covered the Geithner "tax issue".

About seven years ago I transitioned from working at my firm's Tyson Corner, Virginia office to working at home. The move was occasioned by two things: the 9/11 attack and our subsequent PCS orders to southern California. Since my firm is not licensed to do business in California, it was the opinion of their accountant that for tax reasons, they would no longer withhold taxes from my paycheck automatically. In other words, since I was now going to have to pay California state taxes, I moved to the category of the "self-employed".

Sound familiar?

This meant that I had to pay quarterly income taxes.

Now I have never, even in my wildest dreams, contemplated being nominated for Secretary of the Treasury. A pertinent question, at this, would seem to be: just what is the standard of care for a person who We the People purport to put in charge of managing the Treasury?

Is it the standard of care of "the average Joe"? Or do we have a right to expect something better than that: a level of oversight and care consonant with someone at the top of his or her profession? In tort law, there is a comparable concept in the duty of care in negligence suits. The question asked is, "What duty of care did the defendant owe?" If he was an ordinary person, he owes only as much care as a reasonably prudent person of ordinary intelligence would exercise.

But if he is a professional and the incident involves something touching his professional expertise, we expect more of him. We expect him to exercise more care. And there is a second question: can you delegate away your responsibilities (say, to a tax accountant)? The law normally says no to that. You may choose to hire an accountant to do your taxes, but it remains your responsibility to ensure that they are paid. There are reasons for this. One important reason is that your accountant relies upon you to furnish him with the information upon which your returns will be based. Of necessity, you know more about your tax situation and personal finances than does your accountant. You retain access to your records, of which the accountant has only a subset.

I sweated bullets when I moved to California. Filing my quarterly taxes was (at least initially) a nightmare. It meant that I had to actually READ the IRS regs and determine exactly what I needed to pay. If there was any doubt, I overpaid rather than underpaid, and I got on the phone with the IRS and had many conversations with them. The first year I did pay an accountant at year end to do our yearly taxes.

I never did that again. The reason I never did it was that I concluded that I could not delegate away my husband's and my joint responsibility to PERSONALLY ensure our taxes were correctly calculated. For three years I stressed out over our quarterly taxes, which were really a nightmare since I had to estimate my yearly salary in advance, there were penalties for over or underpayment, and I receive bonuses which can amount to 20% of my final take-home pay and over which I have zero control and zero foreknowledge.

Try estimating a year's worth of pay based on that.

So I have little sympathy for a man who received quarterly reimbursement checks for taxes he was informed (by means of itemized IMF statements and notices) he was legally obligated to pay. What did he think those checks were "reimbursing" him for? What did he think the meaning of "reimbursement" was?

This is not an artist who can't be expected to understand incomprehensible financial terms like "tax allowance" or "reimbursement" or “I hereby certify ... that I will pay the taxes for which I have received tax allowance payments from the Fund.”

During a TV news broadcast last night, I also learned that Mr. Geithner's foreign housekeeper initially had valid immigration docs, then they lapsed during her final few months of employment. I don't care quite so much about that sort of thing. If he does due diligence when he hires someone I don't expect a man to constantly monitor someone else's INS paperwork. That sort of sticking a microscope into a nominee's navel jumps the shark.

During the campaign the media obsessively harped on John McCain's "failure" to "vet" Sarah Palin. So I'm really confused here: this is arguably one of the the most important positions in the Cabinet given the financial crisis, and yet the two nominees the Obama cabinet has put forth in the economic arena have both turned out to have some pretty serious skeletons in their closets. Where are the serious questions one would expect from a Fourth estate focused on holding our public servants accountable?

Missing in action. No one should be attacking the President elect or his nominees. But serious questions are not off the table. And this is a serious and deeply troubling question that goes to the core of this nominee's competence. Contrary to the misleading implication the media keep throwing out, Mr. Geithner wasn't a foreign employee . He was an American whose status was clearly covered by the tax manual provided to him by the IMF. He was given quarterly notices and quarterly tax reimbursements that should have put him on notice that he owed these payments, since the very purpose of a "reimbursement" is to indemnify you for a financial outlay. You don't get reimbursed for expenses you don't incur - at least in any world I am aware of. Somewhere along the line, that should have raised a red flag, don't you think?

He signed statements saying he would pay them. This isn't brain surgery. Admit the mistake, find another nominee and move on.

update: Sorry. I refrained from this aspect of the story earlier because I lacked enough time/information for informed commentary, but this, in my book, is a deal-breaker:

In 2006 an IRS audit noted the problem but, due to a three year statute of limitations, only insisted on a correction to Geithner's 2003 and 2004 returns. Geithner complied but did not volunteer to correct his 2001 and 2002 returns until last November, during the vetting process for his Treasury appointment. Thus, Obama's assertion that Geithner made "an innocent mistake" is not wholly accurate - the mistake may have been innocent (or a non-innocent aggressive tax interpretation) when made but stopped being innocent when Geithenr amended his 2003 and 2004 returns in 2006...

As Tom Maguire notes:

...as of 2006 he knew he had a liability for 2001 and 2002 - where was his check? Was his conscience unruffled by his non-compliance? Or does Geithner have a "Don't ask, don't tell" policy on back taxes?

This was pretty much what I suspected, and what prompted me to be as harsh as I was in my original post. This nomination needs to be spiked.

And in fact, as Glenn Reynolds notes, the hearings appear to have been postponed. I think that's French for 'don't quit your day job'.

Posted by Cassandra at January 15, 2009 07:13 AM

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Comments

First!

This is not the Timothy Geithner that Barack Obama knew. Really.

Shocking that there is tax corruption in high places, isn't it? Shocking.

Inflate the tires on the bus, Geithner is goin' under.

Posted by: Don Brouhaha at January 15, 2009 11:17 AM

The predictable phases are again heard from the established.

"It was a mistake, the code was too complex. Would you keep the best and brightest out of government?"

Each translates to "He is a Democrat!"

In reality the rich, many self employed, and the political don't find the tax code too complex. They find it very simple and end up paying a lower tax rate.

The people that get hit in the US are those who work daily and make from $40K to $250K in wages while getting few or no perks. There is little hidden or unknown about their income and property, so they cannot lessen their taxes.

Posted by: K at January 15, 2009 11:50 AM

As has been noted elsewhere: At least he's not an apprentice plumber in Ohio who had the Audacity to Hope to ask Mr. Obama a tax question.

Posted by: Yu-Ain Gonnano at January 15, 2009 01:15 PM

What really ticks me off here is that are some ways that the IRS can go back at least 6 years in an audit. I'm really not familiar enough with the rules to explain it, I just know it can happen because, as my Dad's bookkeeper I experienced it.

It's entirely possible that the scenario that applied to my Dad does not apply to Geithner.

Oh, end result of that audit of six years of tax returns? The IRS paid my Dad $900. AND, I started reading more IRS regs, state regs, and eventually got him reimbursed more than $10,000 from the State of Texas for utility taxes.

They shoulda just left us alone, eh?

As far as not understanding the difference between the employer and employee share of SS and Medicare taxes and for being a complete idiot on what constitutes child care... and for doing his own taxes when he's such an idiot.... well, I don't want him in charge of anything. Not even his current day job.


Posted by: Donna B. at January 15, 2009 10:30 PM

Donna, that's harsh! :)

Posted by: Don Brouhaha at January 15, 2009 10:35 PM

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