• A deal struck to maintain and upgrade Pakistan’s warplanes has prompted speculation the US military may have secured airspace access in return
• Both sides share a common enemy in Afghanistan-based terror groups. But some analysts see China as part of the reason for the F-16 deal as well

• For the first time since the United States cancelled military aid to Pakistan in 2018, Washington this month approved a US$450 million package to maintain and upgrade the South Asian nation’s fleet of F-16 fighter jets, hinting at a thaw in bilateral ties that had turned decidedly frosty of late.

  The deal announced on September 9 followed a flurry of diplomatic activity, prompting speculation that in return for agreeing to keep Pakistan’s warplanes airborne for the next five years, the US military covertly secured access to the country’s airspace to carry out counterterrorism operations.

  Though Islamabad has repeatedly denied any such conspiracy, the assassination in late July of al-Qaeda chief Ayman al-Zawahiri in Kabul is widely believed to have been carried out by a US drone that traversed Pakistani airspace en route to its target.

  And this month’s F-16 deal, described by one analyst as “a bit of a head scratcher”, has only served to raise eyebrows further.

  India, a key US ally and Pakistan’s arch-rival, has already expressed its annoyance at the deal, and analysts have also questioned why Washington would choose to better equip a steadfast China ally when tensions between the world’s two largest economies are at their highest in decades.

  “This being a transactional relationship, one certainly can’t rule out a quid pro quo involving the [F-16 deal] and the use of Pakistani airspace,” said Michael Kugelman, deputy director of the Asia programme at the Wilson Centre, a Washington-based think tank.

  Is Pakistan helping the US carry out drone strikes?

  US-Pakistan ties took a nosedive under the tenure of former President Donald Trump, whose administration cancelled US$300 million in military aid to Pakistan in 2018 and went on to accuse Islamabad of not only failing to take decisive action against militants, but providing a safe haven for insurgents fighting in Afghanistan and disputed Kashmir.

  Pakistan denied the charges, and ties remained turbulent for the rest of former prime minister Imran Khan’s time in power. But Khan was ousted earlier this year and US President Joe Biden’s administration has since upped its diplomatic outreach with both Pakistan’s powerful military and its new coalition government, which assumed office in April.

  Since al-Zawahiri’s assassination, more US drones have been spotted over Afghanistan seeking out militants – operations that Abdul Basit, a research fellow at the S. Rajaratnam School of International Studies in Singapore, said are likely only made possible because Pakistan “is assisting the US in some respect”.

  \“It’s hard to pinpoint the precise nature of that help. But it goes without saying that without some form of Pakistani assistance, the US drone strikes in Afghanistan are hard to pull off,” he said.

  A ranking Pakistani official dismissed such claims, telling This Week In Asia “the assertion that US drones are operating through Pakistan is baseless and frivolous”.

  The official, who asked not to be named because of the sensitivity of the matter, did however point out that the Taliban had earlier vowed it would not allow Afghanistan to be used as a base for planning and carrying out attacks on other countries following the US-led withdrawal of foreign forces in August last year. That promise has not been kept.

  Islamabad is particularly concerned about Tehreek-i-Taliban Pakistan, which aims to overthrow the country’s government and is an affiliate of the fundamentalist group that’s back calling the shots in Kabul. A fragile ceasefire established with the militants in June has worn thin since al-Zawahiri’s assassination, with the TTP claiming responsibility for a wave of cross-border terrorist attacks in northwest Pakistan since August 7, when three of the group’s hardline leaders were killed in an unclaimed roadside bombing.

  Security analyst Faran Jeffrey, deputy director of the Britain-based Islamic Theology of Counter Terrorism think tank, said the fear of direct retaliation made working with the US “Pakistan’s best chance against the TTP now, if it wants to hit the TTP within Afghanistan”, as the group “won’t be able to react against the US since there’s no US target present in Afghanistan to hit back at”.

  ‘This sale is a bit of a head scratcher’

  A procession of senior US officials and a Congressional delegation have visited Pakistan this month to discuss defence cooperation, including the F-16 deal, as well as humanitarian assistance in the wake of the country’s devastating floods.

  The Wilson Centre’s Kugelman said this had come as a surprise for Washington’s opponents and allies alike – particularly New Delhi, whose defence minister said he had “conveyed India’s concern” about the deal to his US counterpart on September 14 in what was otherwise a “warm and productive” phone call.

  “This sale is a bit of a head scratcher,” Kugelman said. “It won’t please India, and it seems odd to be giving this military support to a key ally of China at a moment when US-China competition has reached a fever pitch.”

  But for Basit, the Singapore-based researcher, China may have indirectly been part of the reason Washington decided to go ahead with the F-16 deal in the first place.

  “China’s reluctance to sell high-end military hardware to Pakistan represented an opportunity for the US which the latter has exploited by giving something in return for counterterrorism cooperation in Afghanistan,” he said.

  While the deal is a one-off and unlikely to shift the needle much in terms of Washington’s regional alliances, Kugelman said “it does serve as a reminder of an oft-overlooked fact”: that Pakistan has maintained a largely uninterrupted military alliance with the US since it gained independence 75 years ago.

  The Islamabad official agreed, describing the deal as merely an example of the US’ “follow-on support to Pakistan” – wherein Washington provides technical support for F-16s and other equipment the South Asian nation buys with its own funds – which he said “has never stopped”, even with 2018’s cancellation of military aid.

  Kugelman said the US would “certainly prefer that Pakistan not be so reliant on Chinese military hardware”, such as the J10-C fighter jets and Type 054A/P frigates acquired in recent months. But it also recognises that China’s support could “ramp up as the US and India scale up their own military cooperation”.

  “Let’s be clear: a sole US deal with Pakistan can only do so much,” he said. “It’s a drop in the bucket, given what China has the capacity to provide.”

  The Pakistani official said defence purchases from China were of “no relevance” to the F-16 deal.

  “Being a sovereign nation in a rough neighbourhood, Pakistan has the right to purchase defence equipment that meets its requirements and provides a deterrence against maleficent designs,” he said.

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The West Virginia centrist spent months with Chuck Schumer shaping the Democratic party’s line agenda. In the final hours, he had to agree to several of his Arizona colleague’s demands.

For months, Joe Manchin was the Democrat with all the clout. In the end, even he had to give up some ground.
After Manchin agreed with Senate Majority Leader Chuck Schumer on the party-line tax, health care and energy bill, the West Virginia Democrat found himself negotiating with fellow moderate Sen. Kyrsten Synema. Both tough negotiators, the Arizona Democrat’s business-friendly tax approach clashed sharply with Manchin’s more progressive positions on taxes.

Manchin sought to target the wealthy and ended up agreeing with Schumer to attack the so-called accrued interest loophole that allows some people to pay lower tax rates on investment income. He also signed a corporate minimum tax package that most Democrats believed Sinema supported.

Ultimately, Sinema took a scalpel to the corporate minimum tax and scuppered any change in accrued interest, which Manchin called particularly “painful.” Triangulating between them throughout Schumer, whose job it was to harmonize the views of the very public Manchin with an often-silent Sinema.

“We argue with each other about problems, but we try to respect each other,” Schumer said of Manchin Sunday as he munched on a celebratory meal of leftover pasta cooked by his wife. “Sinema, if he gives you his word, you have it. But she is not a charlatan like Manchin.”

Almost exactly a year after Manchin and Sinema joined Republicans in passing a landmark infrastructure bill, the two moderates on Sunday cast swing votes for the second piece of the Democrats’ puzzle. It was much smaller than the party’s original vision of $3.5 trillion but larger than the limited health care legislation lawmakers were considering just two weeks ago. It is likely to be the last major party-line bill Democrats will be able to introduce in years, with the House expected to switch to Republicans in the November election.

The package delivered more than $300 billion in climate and energy investments, reformed prescription drug prices, and created a new minimum tax for large corporations. The passage of the legislation on Sunday marked a triumphant moment for a party that for years has spoken volumes about lowering drug prices and fighting climate change.

US Senate Majority Leader Senator Chuck Schumer speaks during a press conference following a weekly Senate Democratic Policy Luncheon at the US Capitol on July 20, 2019. 2021. | Alex Wong/Getty Images)
The year-long drama showcased the daily struggles Schumer faces running a 50-50 Senate, cornering a caucus that includes 47 other senators with their own ideas plus Sinema and Manchin, two centrist senators with divergent priorities.

Twice on the Senate floor, Manchin had animated discussions with Sinema about his deal, including parts of the tax legislation that Sinema felt would hamper economic growth in Arizona. Manchin observed of his relationship with Sinema and the tax dispute: “We have more in common than we don’t. I only have a difference in this.”
“Both are neck pains, but neck pains that I respect,” Sen. John Hickenlooper (D-Colo.) said admiringly. “I don’t feel like I’ve ever been misled or said anything that isn’t true.”

Manchin killed the $1.7 trillion Build Back Better bill in December after failed negotiations with President Joe Biden. Two months later, Schumer and Manchin broke bread and Manchin handed over his negotiating position: he wanted to wait until April before trying again. And when they did, he just wanted to talk to Schumer.

After Russia invaded Ukraine and Europe’s energy supplies dwindled while US gasoline prices began to rise, Manchin saw an opportunity to make big investments in climate change while increasing production. of fossil fuels this spring.

“That’s the catapult that basically launched me,” Manchin said in an interview. “Iran is the largest proliferator of support for terrorism in the world, right? And are we going to give them money? Over my dead body.”

“Iran is the largest proliferator of support for terrorism in the world, right? And are we going to give them money? Over my dead body.”
Senator Joe Manchin (D-W.Va.)

In late June, he and Schumer were reviewing a package that generated more than $1 trillion in revenue and spent significantly more than the package approved Sunday. The Sinema team was generally aware of that package, telling leaders in mid-July that it still did not support the accrued interest provision.

But Manchin began to have second thoughts after the July 4 recess, as inflation gauges continued to flash red. He then came on July 14.

“I just said, ‘Chuck, I can’t do that.’ … That’s when he got mad,” Manchin said. “Half an hour later, they put the dogs on me.”

Manchin says he never took it personally, but there are two schools of thought in the Democratic caucus on whether that pressure campaign worked. Some argue that attacks on Manchin by his own colleagues brought him back to the table. Others say that a cohort of Democratic senators who quietly reassured Manchin amid the backlash proved much more effective.

After that outburst, Democrats rallied around prescription drug reform and a brief extension of the Affordable Care Act subsidies, relegating energy, climate change, and taxes to the landfill. Manchin quietly resumed his talks with Schumer just four days later. When they announced their agreement on July 27, the Democratic Caucus was victorious.

There was a problem: Sinema was now in the dark.

In fact, Sinema was briefed on the deal by No. 2 Republican John Thune on the Senate floor. He had a major influence on the Build Back Better bill, eliminating tax rate increases to put together a more palatable tax package for his business-friendly state. And she and Sen. Chris Murphy (D-Conn.) laid the groundwork last year for what would become a key part of the Democrats’ prescription drug bill.

But Sinema never agreed with the provision of accrued interest. And she had other objections.

Senator Joe Manchin speaks to reporters on Capitol Hill in Washington on August 1, 2022. | Photo by J. Scott Applewhite/AP
While Manchin and Sinema had their own conversations, Hickenlooper and Sen. Mark Warner (D-Va.) helped them out. While Warner tried to compromise on accrued interest with Sinema, Hickenlooper suggested a special share repurchase tax to offset Sinema’s requested changes to the corporate minimum tax.

“There’s been a kind of trust-building relationship,” Warner said. “It became clear that some of the changes Senator Sinema wanted were creating some holes.”

On August 4, Warner joined Manchin on his houseboat to discuss Sinema’s soon-to-announce tax deal. After getting soaked in a storm, Warner left in a new outfit, with a pair of shorts and a Manchin t-shirt, and hoping that Manchin, Sinema, and Schumer would agree. (On Saturday, Manchin returned Warner’s suit, fully pressed.)

But Sinema wasn’t done yet, even after rushed language limiting the ability of companies to write off some investments. When Democrats unveiled the final legislation on Saturday, they imposed the minimum 15 percent tax on some privately owned businesses. That had been included in earlier versions of the legislation but was omitted from the initial draft of the Manchin agreement.

Manchin said that once he agreed with Schumer, the two were “hooked up to the waist” to prevent changes to the bill that could jeopardize its passage, which Schumer said was a “key piece” of the deal. . Sinema had no such agreement, and when the legislation came to the floor for amendment votes, she privately teamed up with Thune to reverse the tax change.

That required Manchin and the rest of the Democrats to make another compromise. Schumer went around the Senate floor telling his members that, even if they don’t like it, they had to eat the change to pass the bill.
Schumer members were unhappy, according to a Senate Democrat, but they were exhausted and resigned to doing whatever it took to finish the bill. Warner stepped in with a way to fill that revenue hole as well. About 15 minutes later, the bill was approved after 22 hours on the Senate floor.

For Schumer, it was the cornerstone of a 50-50 Senate in which he passed new laws on gun safety, infrastructure, veterans’ health benefits, and microchip manufacturing. For Sinema, the moment proved that he just isn’t on the same level as Manchin, or the rest of his crew.

And for Manchin, the legislation turned his reputation from the guy who stopped Biden’s agenda in its tracks to the senator from the coal state who not only struck a climate deal but helped sell it any way he could.
“I’ve never seen more balanced legislation come together,” Manchin said. “We never knew this day would come.”

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• To get Sen. Kyrsten Sinema’s vote and passage of the Inflation Reduction Act, Majority Leader Chuck Schumer said Democrats “had no choice” but to remove the provision that would have closed the loophole. statutory bill of the accrued interest law.

• Sinema has been fighting for at least the past year to help preserve the tax break, which allows hedge fund managers, law firm partners and private equity executives, among others, to pay significantly lower taxes than workers ordinary.

• Since the start of the 2018 election cycle, he has raised at least $2 million from the securities and investment industry, surpassing Senate Bank Chairman Sherrod Brown’s $770,000 in industry donations during the same time, according to display the FEC data.

• Long before Sen. Kyrsten Sinema, D-Arizona, stopped a massive spending bill that promised to create jobs, invest in clean energy and tax the wealthy, delivering on some of President Joe Biden’s top campaign promises and from the Democratic Party, those working at Wall Street investment firms had donated millions to the rookie senator’s campaign.

• One of his main objections was the bill’s so-called interest tax provision, which would have closed an arcane loophole in tax law that allows hedge fund managers, law firm partners and equity executives private, among others, pay significantly lower taxes than ordinary workers.

• Closing that loophole, estimated to raise $14 billion in tax revenue over the next decade, was supposed to help pay for $433 billion in spending on health and climate initiatives.

• To get Sinema’s vote and passage of the bill, Senate Majority Leader Chuck Schumer said Democrats “had no choice” but to remove that provision from the Inflation Reduction Act more wide. Instead, the bill imposes a 1% tax on all corporate stock buybacks along with a minimum 15% corporate tax rate on companies with more than $1 billion in revenue. The massive spending and tax package made its way through the evenly divided 51-50 Senate on Sunday with Vice President Kamala Harris’s tie-breaking vote. It is expected to be approved by the House later this week.

• American Investment Council

• As Biden rallied support in the Senate a little over a year ago to close the loophole, the head of the trade group representing the world’s largest private equity firms began ratcheting up pressure on Sinema and Senator Mark Kelly, his fellow Democrat from Arizona.

• “Arizona Senators Kyrsten Sinema and Mark Kelly will be critical voices and votes in the upcoming infrastructure debate,” wrote Drew Maloney, president and CEO of the American Investment Council, in an op-ed published by an Arizona news outlet . The trade group represents some of the world’s largest private equity firms, including Blackstone, Apollo Global Management, Carlyle Group and KKR. “I urge you to continue to support the role of private investment in helping small businesses here in Arizona and across the country,” he added.
• One of the main priorities of the group was then, and is now, to preserve “capital gains with accrued interest and avoid the elimination of the deductibility of interest”.

• “Our team worked to ensure that members of Congress on both sides of the aisle understand how private equity directly employs workers and supports small businesses in their communities,” Maloney said in a statement to CNBC. “Our advocacy helped prevent punitive tax increases that would make it difficult for investors to continue to support jobs, small businesses and pensions in every state.”

Sinema has been fighting to help preserve the loophole since at least last year when he told Democratic leaders that he opposed closing the interest-earning tax break. He was later removed from a House bill, according to NBC News.
Sinema’s opposition, along with several objections from Sen. Joe Manchin, D-W.V., helped sink a much broader version of the bill, which was scaled back significantly to win over the two moderate Democrats.

‘What’s best for Arizona’

“Senator Sinema makes every decision based on one criterion: what is best for Arizona,” Sinema’s spokeswoman, Hannah Hurley, told CNBC in an email. She said Sinema has made it clear for more than a year that she will only support tax reforms and revenue options that support Arizona’s economic growth and competitiveness. Sinema believes “disincentivizing” investment in Arizona businesses would hurt the state’s economy and its ability to create jobs, Hurley said.

In the weeks leading up to Sunday’s vote, Sinema’s office was inundated with calls from lobbyists representing hedge funds, private equity firms, and other money managers arguing against closing the interest tax loophole. , according to people familiar with the matter. In the run-up to last week’s deal, the senator and her team held numerous in-person meetings with industry, said some of the people familiar with these meetings, who asked not to be identified to speak freely about private efforts to connect with industry. Cinema. .

Since she was elected to the Senate in 2018, Sinema has been a sympathetic ear for the industry. Last September, he met for lunch at a Philadelphia restaurant with Michael Forman, who manages at least $34 billion as CEO of Philadelphia-based investment firm FS Investments, and one of his executives, according to people familiar with the matter. with lunch. Forman did not respond to emails and calls seeking comment.

“Every major industry that doesn’t support what’s out there is meeting with Sinema, and she’s meeting with anyone and everyone,” a lobbyist representing some of the world’s largest investment firms told CNBC earlier. after Schumer announced Thursday night that Democrats were on board. abandon the provision of accumulated interest to obtain the vote of it. Sinema said she would work separately “to enact interest-bearing tax reforms.”

private equity donors

Even before Sinema was elected to the Senate in 2018, she supported private equity investors as a member of the House of Representatives. In 2016, Sinema said the industry provided “billions of dollars each year to Main Street businesses,” according to The New York Times.

Sinema won a coveted seat on the powerful Senate banking committee and made quick work of networking and raising donations from the industry she would oversee. Since the start of the 2018 election cycle, he has raised at least $2 million from the securities and investment industry, topping Senate Banking Chairman Sherrod Brown’s $770,000 in industry donations during the same time, according to data. from the Federal Election Commission analyzed for nonpartisan campaign financing. OpenSecrets watchdog. Both Sinema and Brown, D-Ohio, is up for re-election in 2024.

Sinema’s collection includes $10,000 in campaign donations from the American Investment Council’s political action committee, half of which was donated to her campaign after Maloney’s op-ed ran last year.
Employees of private equity firms Kohlberg Kravis Roberts, Carlyle Group, and Apollo Global Management donated more than $95,000, combined, to Sinema from the 2018 election through the current 2022 election cycle, according to campaign finance data.

That includes $11,600 in combined donations from KKR co-founders Henry Kravis and George Roberts, according to Federal Election Commission filings. Records show that the Carlyle and Apollo PACs also donated a combined $15,000 to Sinema’s re-election campaign.

Representatives for KKR and Carlyle declined to comment. Representatives for Apollo and Blackstone did not respond to requests for comment.

“Congratulations to the P/E lobby!”

The reason some of Wall Street’s wealthiest money managers want to preserve the accrued interest loophole is that it taxes their earnings at a lower rate than ordinary income. Instead of paying standard individual income tax rates of up to 37% for people earning more than $539,900 ($647,850 for married couples filing jointly), accrued interest is taxed at the capital gains, which is typically around 20% for high-income individuals. employees provided that the investment is maintained for at least three years.

Democrats wanted executives to hold onto those investments for at least five years to get a better rate. The industry defends the accrued interest tax break, saying it helps preserve investments that benefit small businesses. Critics say it’s just a big tax break for the wealthy.

Lloyd Blankfein, the former CEO of Wall Street investment bank Goldman Sachs, mockingly congratulated the private equity industry on Twitter after the accrued interest provision was removed from the Inflation Reduction Act: “Kudos to the lobby! of P/E! After all these years and budget crises, the highest paid people still pay the lowest capital gains tax on earnings from their work.”

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