There’s going to be an unfamiliar face controlling the nation’s money on January 20. Stuart Levey, the Treasury undersecretary for terrorism and financial intelligence, will be filling in as Treasury Secretary until a successor to Hank Paulson has been confirmed by the Senate. For the second time this week, the Senate Finance Committee’s confirmation hearing for Timothy Geithner, President-Elect Obama’s nominee for Treasury Secretary and the former president of the Federal Reserve Bank of New York, has been rescheduled for January 21 at 10:00 AM.
The Treasury Secretary oversees the Internal Revenue Service, and some politicians began to grumble after news reports surfaced that Geithner had failed to pay Social Security and Medicare taxes on his income from 2001 to 2004 when he worked for the International Monetary Fund (IMF). Geithner admits he received IMF instruction and literature, and signed an annual tax allowance request worksheet to the IMF acknowledging he was responsible for paying the taxes. Geithner paid back taxes with interest on his 2003 and 2004 tax returns after being audited by the IRS in 2006.
Despite the fact he did not pay taxes on his 2001 and 2002 returns, Geithner did not pay the IRS for the back taxes and interest until President-elect Obama nominated him to be Treasury Secretary. Other tax errors on returns brought Geithner’s back tax tab to over $34,000 which he has paid. These include taking a dependent care tax deduction while his child was at overnight camps, an improper small business deduction, a charitable contribution for ineligible items, and the expensing of utility costs for personal use.
It never ceases to amaze me that people who have chosen to make their career in public service seem to have ethical issues that pose a potential or actual derailment of their career over taxes and/or household help. Although questions were raised earlier in the week about a housekeeper working in the Geithner home whose green card expired during her employment there, the issue appears to be a moot point and the woman is now a legal US resident.
Geithner’s nomination raises three key issues: credibility, the insanity of the tax code, and most importantly, his role in allowing Lehman Brothers to collapse.
Geithner’s tax tale strains his credibility to do his job. If confirmed, he will oversee the IRS, making sure the agency enforces the rules of the tax code - rules that he himself chose to conveniently overlook. It also strains the credibility of President-Elect Obama who set the ethical bar high during the campaign. Supporters say Geithner is too important to worry about such indiscretions.
For people who are not concerned about the credibility issue, consider the bigger picture Geithner’s situation raises. Thousands of people each year file their tax return after making every effort to ensure they completed the return accurately and honestly, whether prepared by themselves or by their accountant. The tax code is so complex and unwieldy that I guarantee if you had 10 accountants prepare the same individual’s return you would get multiple variations. And why should an individual have to pay for books, software or an accountant to prepare it in the first place?! Democrat or Republican, every year the tax code grows bigger as politicians use it to shape social policy, or more cynically to pay off political debts. The complexity of the tax code primarily benefits those at the highest income levels. A flat tax with no itemization except for a high standard deduction would make it hard to cheat or make a mistake. If Republicans love President Reagan as much as they profess to, they would seize on Geithner’s situation as an example of why the nation needs kill the tax code once and for all.
Far more troubling than Geithner’s taxing situation is his role at the center of the financial crisis, specifically what role he had in the fateful decision to let Lehman go under which triggered a financial tsunami worldwide. The Senate Finance Committee needs to specifically grill Geithner on every detail that took place September 12-15, 2008. After all it was Geithner who had corralled the top bank CEOs in the basement of the New York Fed that weekend.
The Senators should ask Geithner:
Why wasn’t the Fed willing to temporarily backstop Lehman while Barclays (BCS) got UK regulatory and shareholder approval to buy Lehman?
Why did the Fed lend a total of $138 billion to LBI New York, Lehman’s broker-dealer business that was not part of Lehman’s bankruptcy filing? (Fed apologists claim the loan was made as part of “an orderly wind down” of Lehman and was not the same as lending to “an ongoing concern.” Barclays paid the Fed back after the bankruptcy judge approved the sale of the unit to Barclays.)
Most importantly, Geithner should explain to us the cost of imposing moral hazard. What was the penalty for scaring investors away from purchasing the common stock of any financial company? Geithner should explain how the scenario would have played out differently if instead of punishing shareholders, shareholders were rewarded for making additional investments into financial companies’ common stock. Would we have been better off taking a less ideological approach to the financial crisis?
And finally, the Senators should ask Geithner if he would act any differently under the Obama administration than he acted under the umbrella of the current administration.