Geithner’s tax problem, Goolsbee’s solution?

I’d been expecting Treasury Secretary-designate Tim Geithner to come up for some grilling in his confirmation hearing, over his role in the TARP bailout and in the orgy of deregulation of the late 1990s.  (Neither of those things is necessarily disqualifying in my eyes, as long as he can show that he’s learned from his and other people’s mistakes.)  But as with past nominees, from John Tower to Zoe Baird and Kimba Wood, it’s the small stuff of dubious relevance that tends to blow up — and distract Congress, the media, and the public from issues of actual substance.   The main distraction this time: Geithner failed to pay $43,000 in federal taxes.

On the surface, this looks pretty bad:  the guy who would be the head of the agency that oversees the IRS, failing to pay his Social Security and Medicare taxes for four years in a row (2001-2004).  But not so fast.   Most of us have those taxes withheld directly from our paychecks and don’t think about them otherwise.   Geithner, by contrast, was working for the International Monetary Fund (IMF), where employees don’t pay federal income tax.  Several of my grad school friends went to work for the IMF, and I distinctly remember them saying, it’s great, we don’t pay taxes.  The incoming administration’s talking points on the matter (take them with a grain of salt if you want) note that this confusion is very common among IMF employees.

There seem to be at least a couple lessons here:

(1) As Dean Baker has pointed out:  Get a clue, IMF!  Roughly half their workers, according to a 2007 IRS report, made the same mistake. Should it be so hard for an organization that gives economic advice to countries all around the world to give some basic tax advice to its employees?  Maybe they could print “Don’t forget to pay your payroll taxes!” on everyone’s pay stubs?

(2) Don’t do your own taxes.  Here I can relate to Geithner — when you have a Ph.D. in economics or are a high-level economic policymaker, you like to think that the U.S. tax code is something you can handle.  You are wrong.  (The exception is for people with very simple finances.)  The tax code, with its countless exemptions and different types of income, is basically a legal document, not an economic one.  A good tax accountant will know the intricacies of the tax system; someone with a handful of forms and instruction booklets will not.  And, of course, if your job and time (and sanity) are important, then the opportunity cost of spending several hours doing your taxes is less than what you’d pay a preparer.

Another Obama nominee, Austan Goolsbee, had a great idea a few years back called “The Simple Return”:  Have the IRS do everyone’s taxes, at least as a first pass.  It’s less fanciful than it sounds:  the IRS already possesses a lot of information on people’s incomes and tax payments (from W-2’s, 1099’s, etc.), and furthermore they do their own calculations of your tax liability after you send in your return.   (Indeed, that’s what happened to Geithner.)  To be sure, the information the IRS has is incomplete for a lot of people, but it would be a nice headstart, and it could save a lot of people some time and/or a trip to H&R Block.

UPDATE, 15 Jan. 2009:  It looks like this service, had it existed in 2001-2004, might actually have gotten Geithner off the hook.  Line 58 of the current 1040 form deals with Social Security and Medicare tax on “self-employment income” such as that earned by an IMF employee.

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