02.04.09

Why Geithner Was Worse Than Daschle

The Pulitzer Prize-winning reporting team—and authors of The Great American Tax Dodge—on the breakdown of America’s tax system—and why Timothy Geithner’s lapses were far more egregious than Tom Daschle’s.

The tax troubles of some of President Obama’s Cabinet nominees have exposed one of Washington’s dirty little secrets: Tax avoidance, error and fraud are out of control.

The terms "taxpayer error" and "taxpayer mistake" have become convenient ways to describe the complete breakdown of the American tax system. By our own rough estimate, as much as $600 billion—more than two-thirds of the government’s stimulus package—is lost each year as a result of tax fraud and avoidance.

Geithner actually acknowledged years ago that he owed the taxes—but didn’t pay them until he was nominated for the Treasury job. That hardly counts as a mistake.

But don’t look for Congress to order the IRS to begin collecting. For a quarter-century, lawmakers have toiled tirelessly to discourage enforcement of the Internal Revenue Code. Thomas F. Daschle and Treasury Secretary Timothy F. Geithner are the latest poster boys for the success of that campaign.

But their offenses were not equal. Despite the fact that Geithner sailed through the confirmation process—while Daschle went up in flames—Geithner’s tax troubles were actually far more egregious. People tend to give Geithner a pass, because the overall amount he owed was smaller and it just involved Social Security and Medicare, rather than income tax. But Geithner actually acknowledged years ago that he owed the taxes—but didn’t pay them until he was nominated for the Treasury job. That hardly counts as a mistake.

Daschle, for his part, failed to count as income the value of a car and driver he received from a New York private-equity firm, InterMedia Advisors, during 2005-2007. He also overstated charitable contributions and understated income from InterMedia, which paid him $1 million a year. Daschle filed amended tax returns last month reporting $128,203 in additional taxes and $11,964 in interest. The revised tax returns were submitted after President Obama announced that he intended to nominate Daschle to be secretary of Health and Human Services.

Geithner’s situation was nonetheless a bigger ethical lapse. As an employee of the International Monetary Fund in 2001 and later years, Geithner was responsible for sending a check to the IRS to cover his own payroll taxes. He didn’t do so. What he did do was submit a request to the IMF for reimbursement of those taxes. And he collected.

According to the Senate Finance Committee, Geithner “filled out, signed and submitted an annual tax-allowance request with the IMF that states, ‘I wish to apply for tax allowance of US federal and state income taxes and the difference between the ‘self-employed’ and ‘employed’ obligation of the US Social Security tax which I will pay on my Fund income.’” In other words, Geithner—now charged with making sure Americans obey the tax laws—was given money by his employer to pay his taxes, but then didn't pay them. Not until, that is, he decided to become Treasury secretary.

Geithner dismissed his actions as “careless mistakes.” Whatever the case, the “mistakes” were not detected until he was a candidate for the top job at Treasury. That’s when he paid, years late, $34,023 in self-employment taxes that he owed and $8,679 in interest, for a total of $42,702.

Tom Harkin, the Iowa senator, was one of only three Democrats disturbed enough to vote against Geithner’s confirmation. As he put it on the Senate floor: “How can Mr. Geithner speak with any credibility and authority as America’s chief tax-enforcement officer?”

Geithner has plenty of company. Hundreds of thousands of other Americans—quite likely several million—also are ignoring or avoiding their payroll-tax obligations. Their ranks have swelled as a result of the government’s outsourcing of contracts for the wars in Iraq and Afghanistan. But contract employees everywhere often are paid through companies operating abroad that do not withhold the taxes deducted from the paychecks of most working Americans. For its part, Congress has made sure that the IRS lacks the resources required to collect those taxes, as well as income taxes.

Beginning with the Reagan revolution in the 1980s, Congress deliberately stymied tax-law enforcement. It refused to authorize adequate funding. It slashed enforcement efforts. It killed effective programs in place since the 1960s, like the Taxpayer Compliance Measurement Program. Under that program, IRS subjected a select number of returns to intensive audits to determine the extent of taxpayer fraud and error so as to better allocate enforcement resources. But in 1995, after three decades, lawmakers finally marshaled enough support to terminate the TCMP audits. It did so by starving the agency for funds. In a related development, when lawmakers forced the canning of thousands of IRS agents, a jubilant Senator Charles E. Grassley, Iowa Republican, said that it would mean fewer “agents looking through your files.” In other words, taxpayers who cheated could continue to do so with impunity—at the expense of law-abiding citizens who paid the taxes they owed.

How bad is it? The giant Swiss bank UBS maintains secret accounts for 19,000 Americans who have failed to report their existence as required by law. Those accounts hold $18 billion.

The Swiss are resisting efforts to force disclosure. Even if the account holders are identified it would mean little. As longtime Washington tax lawyer and analyst Martin Lobel puts it, “nothing much is going to happen.” That’s because the IRS lacks the resources to pursue that many tax cases.

Donald L. Barlett and James B. Steele are contributing editors at Vanity Fair and have been writing about taxes for nearly four decades. Barlett and Steele have won virtually every major national journalism award including two Pulitzer Prizes and two National Magazine Awards. They are the authors of The Great American Tax Dodge , How Spiraling Fraud and Avoidance Are Killing Fairness , Destroying the Income Tax, and Costing You , and six other books.