Geithner faces tough questions on taxes, TARP

John W. Schoen Senior producer • Profile • E-mail

New York Federal Reserve President Timothy Geithner, once was seen as a shoo-in to be Treasury secretary under President-elect Barack Obama, is suddenly facing tough questions.

This week's disclosure that he failed to pay some income taxes over a four-year period forced a delay in his Senate nomination hearing. At the same time there is a growing chorus of criticism over the management of the government's $700 billion financial industry bailout in which Geithner played a key role.

Geithner was one of the first Cabinet-level officials nominated by Obama in November and his confirmation initially was expected to be easy, considering his strong qualifications and close involvement with efforts to halt the financial industry meltdown.

But on Wednesday his confirmation hearing was postponed until next week after the Senate Finance Committee received a report containing the full details of his tax delinquencies.

Sen. Charles Grassley, R-Iowa, said the delay was needed to give members of the full Senate a chance to review the report. In an interview with CNBC, Grassley said there was no question that Geithner is qualified to run the Treasury Department. But Grassley wouldn’t speculate on the impact of the tax disclosures.

“We've got to re-establish credibility in the markets, and having people that are credible in the secretary of Treasury's position is important,” Grassley said. “These are critical times; the economy is very bad, we need strong leadership. Nobody questions his leadership, but there are questions about sloppiness that need to be resolved, and they have to be resolved to the satisfaction of a large number of the people on the committee.”

Video   Treasury nominee under fire Jan. 14 - CNBC reports that Timothy Geithner, President-elect Barack Obama's choice for Treasury Secretary, is taking heat over his failure back taxes. MSNBC

The delay comes as the global financial markets continue to try to find a footing amid a worsening economic downturn, and the U.S. economy continues to show signs of deterioration. The Dow Jones industrial average fell sharply Wednesday after the Commerce Department reported that retail sales dropped 2.7 percent last month, more than double the 1.2 percent decline expected.

The controversy surrounding Geithner’s nomination is reminiscent of President Bill Clinton's  unsuccessful nominees for attorney general, Zoe Baird and Kimba Wood. (Baird's nomination failed after it was learned she failed to pay taxes for a household employee; Wood’s nomination was derailed because she hired an undocumented worker.)

Geithner’s nomination also is clouded by the disclosure that he employed a housekeeper in 2005 after her legal immigrant work status had lapsed for three and a half months. But several senators said Wednesday they view that as a “technicality.”

The more troublesome problem is related to his failure to pay some $34,000 in back taxes.

Sen. Arlen Specter, R-Pa., said Wednesday he has not decided whether to oppose the nomination but said the missed tax payments were “not a trivial matter.”

“Look here, the secretary of the Treasury is in charge of the Internal Revenue Service on collecting taxes, and integrity is very important,” he told Fox News. “And if the top man doesn't pay his taxes, what kind of an example does that set for everybody?  And you can be sure when the cases are hauled to court or before the IRS, a lot of people will be saying, 'Well, if the top guy did it, I ought to be entitled to some leniency too.'”

The delinquent taxes relate to Geithner’s employment at the International Monetary Fund from 2001 to 2004. Because foreign organizations like the IMF don’t pay Social Security and Medicare taxes, individual employees are responsible for paying the employer's share. Geithner failed to do so for those four years. The IRS reports that this is a common mistake made by roughly half of all Americans in his situation.

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