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

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