Geithner Can’t Explain His Failure to Pay Taxes

by Byron York

The treasury secretary–designate's answers leave some senators baffled.

What was he thinking? That is without doubt the question asked most often by nearly everyone looking into Treasury Secretarydesignate Timothy Geithner’s failure to pay Social Security and Medicare taxes in 2001, 2002, and 2003. It’s certainly the question that will be asked at Geithner’s confirmation hearing on Wednesday. But it is also the question perhaps least likely to be answered to anyone’s satisfaction, because according to sources close to the confirmation process, Geithner doesn’t have an answer to that most basic question about his behavior.

“His explanation was kind of, ‘I don’t know–it was stupid, obviously it was a mistake, and I don’t know why I did it,’ recalls a senator who was present during Geithner’s surprise appearance before a members-only meeting of the Senate Finance Committee last week. “What do you say to that?”

The meeting was the first time that members other than chairman Max Baucus and ranking Republican Charles Grassley heard of Geithner’s tax problem. Baucus and Grassley had known about the issue since early December, but last Tuesday’s meeting was part of a carefully planned roll-out for the other members of the committee. First, committee investigators explained the problem to the senators. Then, Geithner himself came in and responded to their questions. And while that was happening, Obama transition officials began to distribute a set of talking points defending the nominee. “They put out their release before our meeting with Geithner even ended,” says the senator. “We did not know about any of it until we walked into the meeting.”

What senators learned at the gathering was not only that Geithner had failed to pay self-employment taxes during his time at the International Monetary Fund. They learned that the IMF had repeatedly informed Geithner, as it had all its employees, of his obligation to pay that tax. They learned that Geithner signed documents saying he would pay the tax. And they learned that Geithner accepted IMF reimbursement for Social Security and Medicare taxes that he had not, in fact, paid. Geithner paid part of his obligation after a 2006 Internal Revenue Service audit, and the rest of it after he was nominated to become treasury secretary. In all, he paid $42,702 in back taxes and interest. In addition to his payment of the unpaid self-employment taxes, Geithner also had to pay $5,566 to cover other shortfalls in his tax payments, for a total of $48,268 in back taxes and interest.

Since their meeting with Geithner was the first time that most senators had heard of the problem, their questions were not terribly detailed; several of the queries were along the lines of “What were you thinking?” And Geithner’s answers were not terribly satisfying. “He can’t offer a specific reason,” says another source familiar with what went on at the meeting. “He doesn’t really have an answer. He just didn’t know.”

So why did Geithner not pay the taxes in question? There is no obvious answer. It could have been pure oversight–a “common mistake,” as the Obama transition team has called it. But there are questions about how common the mistake actually was; an IMF official, while not commenting on Geithner’s case in particular, has said that instances of non-payment of taxes by IMF staffers are relatively rare. If Geithner’s problem was not common, then some senators will want to know whether there was anything about Geithner’s particular circumstances in 2001, 2002, and 2003 that might have contributed to his actions. Was he distracted? Was he short of money? Was there anything else going on that might have affected his decision-making concerning his taxes?

In the end, senators will be looking for any reason to explain why a man of Geithner’s financial sophistication–he came to the IMF after a stint as a high-ranking official in the Treasury Department and left the IMF to become head of the Federal Reserve Bank of New York–could have made such mistakes on his taxes. If he were confirmed as treasury secretary, Geithner would, among other things, oversee the IRS, something that makes his tax problem all the more relevant to his confirmation. “This is the guy who heads up the IRS,” says the senator who is baffled by Geithner’s situation. “All the taxpayers look to him, and when he says, ‘Gee, I don’t know why’–does that become a defense?”