The Cable

Clinton presses Pakistan to raise taxes on wealthy

The Obama administration is not just seeking to end tax cuts for America's rich -- it's also calling on the Pakistani government to raise taxes on its wealthiest citizens if it still wants to receive U.S. financial assistance.

The United States has pledged billions of dollars in aid to Pakistan since Obama took office, and promised hundreds of millions more in disaster relief after the country was hit by devastating floods. Obama administration officials, while still contending that the aid advances the fundamental U.S. interest of building a stable Pakistan,  are now saying that Islamabad will have to come up with more money of its own if it wants to keep getting handouts from Washington.

"This is one of my pet peeves: Countries that will not tax their elites but expect us to come in and help them serve their people are just not going to get the kind of help from us that they have been getting," Secretary of State Hillary Clinton told an audience Tuesday at the U.S. Global Leadership Coalition conference.

"Pakistan cannot have a tax rate of 9 percent of GDP when land owners and all of the other elites do not pay anything or pay so little it's laughable, and then when there's a problem everybody expects the United States and others to come in and help," Clinton said to a round of applause. She noted that Pakistan's finance minister is now presenting a package of economic and tax reforms.

Treasury Secretary Timothy Geithner, who was also on the same panel, drove home  the message that countries who want U.S. development aid must adopt the reforms that Clinton is advocating.

"I've been doing this for a long time and I have never heard a discussion like this, where you have the secretary of state saying what she just said, which is recognizing that unless we are tougher on how we provide assistance...we should not be financing them at this level," Geithner said.

Panel moderator Frank Sesno noted that scaling back assistance to Pakistan, and countries like it, could conflict with other U.S. objectives in the region, such as bolstering the government's internal stability.

"All of these objectives are going to be in conflict at one time or another," Geithner responded. If the countries do not make the required reforms, "We're not going to be able to justify financing [them] on this scale," he said.

On Monday, Af-Pak envoy Richard Holbrooke made a similar plea while appearing on the Rachel Maddow show.

"Their maximum tax rates are much lower than ours, and there's a lot of tax evasion there, as has been well reported. And we can't ask American taxpayers to pay the burden if the Pakistanis don't raise their own revenue," Holbrooke said. "So I don't want to leave people with the impression we're going to pay for the reconstruction phase."

In an interview, USAID Administrator Rajiv Shah told The Cable that the multi-billion reconstruction effort that Pakistan faces in the wake of the flood crisis is "going to be much more successful" if Pakistan adopts the Obama administration's suggestions to ""implement a stronger tax regime that's ... more effective."

He also called on Pakistan's government to allow outside auditors to be more involved in the distribution of aid money, and increase accountability for how foreign assistance is spent.

Shah also said that he has no specific objections to using funds from the Kerry-Lugar aid bill to fund long-term reconstruction in Pakistan.

"I think the distinction is a little bit overblown, because the goal should be using our resources in a way that achieves the highest long-term rate of return," Shah said. "So if you get a higher rate of return from taking money from drip irrigation and moving it into supporting seed and fertilizer for farmers to go back to their lands, then we should do that. And we are doing that."

Clinton, Geithner, and Shah were speaking on a panel about the president's new development policy. They were joined by Defense Secretary Robert Gates and Chairman of the Millennium Challenge Corporation Daniel Yohannes.

Gates lamented that the State Department and USAID can't seem to get enough money from Congress to fulfill its mission, especially when it comes to the U.S. presence in Iraq.

"We are making a transition to a civilian-led process [in Iraq], but the Congress took a huge whack at the budget that the State Department submitted for this transition," Gates said.

"It reminds me of the last scene in Charlie Wilson's War."

Mark Wilson/Getty Images

The Cable

DeMint still pushing for missile defense against Russia

Senator Jim DeMint (R-SC), who has been known to confuse Russia for the Soviet Union, isn't backing down  from his position that the United States should build a huge missile defense system capable of defending against every possible missile attack from every possible foreign threat, including Russia.

DeMint created havoc with his missile defense proposal at this month's Senate Foreign Relations Committee business meeting, where he offered an amendment to the resolution to ratify the START nuclear reductions treaty that would have committed the United States to building a missile defense system to protect every American everywhere, at all times. Chairman John Kerry (D-MA) eventually worked out a compromise with DeMint that didn't include this commitment but did endorse the idea of moving away from the principle of "mutually assured destruction" that has been a cornerstone of U.S.-Russia nuclear deterrence for decades.

Undeterred (pun intended), DeMint offered an amendment last week to the defense authorization bill for the 2011 fiscal year that would require the United States "to deploy as rapidly as technology permits an effective and layered missile defense system capable of defending the territory of the United States and its allies against all ballistic missile attacks."

This amendment would constitute a wholesale transformation of U.S. missile defense policy, which would commit the United States to defending itself against the missile arsenals of Russia, China, and others. The current missile defense system is only designed to defend against rogue states like North Korea and Iran.

Senator Bob Corker (R-TN) and Jon Kyl  (R-AZ) also proposed an amendment that is pro-missile defense, but is not framed in such a way that explicitly antagonizes Russia, or obligates the United States to take on the costs required to build a system designed to shoot down any ballistic missile.

Corker and Kyl's amendment states clearly that the Obama administration's missile defense plan, known as the Phased Adaptive Approach, "is an appropriate response to the existing ballistic missile threat from Iran to European territory of North Atlantic Treaty Organization countries, and to potential future ballistic missile capabilities of Iran." He also called on the United States to cooperate with Russia on missile defense, noting that the current plan "is not intended to ... provide a missile defense capability relative to the ballistic missile deterrent forces of the Russian Federation, or diminish strategic stability with the Russian Federation."

Their reference to "strategic stability" is key because the Russians have made clear that they would unilaterally withdraw from the START treaty if they believe "strategic stability" with the United States is upset. Corker supports the treaty, and his amendment's inclusion of this language is a bid to keep the treaty alive. DeMint is against the treaty.

"DeMint's advocacy of a nationwide Star Wars system is really back to the future, a past rejected even by George W. Bush because it was dangerous and wildly expensive," said John Isaacs, executive director of the Council for a Livable World."The Republican Party has moved so far to the right that even Jon Kyl and Bob Corker are relative moderates -- relative to DeMint."

DeMint's advocacy for missile defense against Russia also puts him at odds with Defense Secretary Robert Gates, who has attempted several times to explain to DeMint that no administration, Republican or Democrat, has suggested building missile defense aimed at Russia.

"That, in our view, as in theirs, would be enormously destabilizing, not to mention unbelievably expensive," Gates told DeMint in a May 10 Senate Foreign Relations Committee hearing.

DeMint and Corker's amendments were never voted on because the Senate failed to start debate on the defense authorization bill, due to GOP opposition to repealing the ban on gays serving openly in the military.

The START treaty, which was approved 14-4 by the Foreign Relations Committee on Sept. 16, could be voted on in the November lame-duck session or might be pushed to next year. DeMint was a no-show for the committee vote on the New START resolution.