SPECIAL REPORT

Fallout From WikiLeaks Document Dump; Tax Cuts as Election Issue

The following is a rush transcript of the July 26, 2010, edition of "Special Report With Bret Baier." This copy may not be in its final form.

(BEGIN VIDEO CLIP)

JULIAN ASSANGE, WIKILEAKS FOUNDER: Hopefully, a deep understanding and scrutiny of the war in Afghanistan, and as a result, changes in policy about the persecution, prosecution of war --

The consideration given by all parties into how they want to continue.

GEOFF MORRELL, PENTAGON PRESS SECRETARY: They claim to go through these doubts and render judgment on whether anything inside could harm U.S. forces, but what is their expertise to make those judgments? We are the only ones who are really equipped to make that judgment. They don't seem to have those kinds of expertise. So that is disturbing.

(END VIDEO CLIP)

BRET BAIER, ANCHOR: U.S. officials are assessing the damage of this release of 91,000 classified documents categorized by the U.S. military as "secret battlefield reports," from 2004 to December of 2009, by this antiwar website WikiLeaks.

Among the documents out there is that Pakistan's intelligence service, the ISI, was supporting actively the Taliban insurgency inside Afghanistan, and also that Iran is doing the same thing in the eastern part of the country.

Let's bring in our panel tonight, Steve Hayes, senior writer for the Weekly Standard; Juan Williams, news analyst for National Public Radio, and syndicated columnist Charles Krauthammer.

Charles, the purpose of this leak from WikiLeaks, is an antiwar message that they hope opens the eyes of the world to how bad Afghanistan is going.

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: Well, I'm not sure that this release will have that effect. I think there are two questions here, there is content and process. On the content I am unimpressed but on the process I'm concerned.

On the content, there is nothing essentially fundamentally new. The fact that the ISI and the Pakistanis are playing a double game, well-known. Everyone knows that. The fact that the war effort was going badly in 2009, well, the administration admitted it, the president said it, General Petraeus have said it. Why do you think they asked for an increase in troops? That there have been civilian casualties in the air strikes against terrorists, we have known that, as well. There is nothing new here except, perhaps, that the enemy has heat-seeking missiles. If so, you do not need 90,000 pages. That would take one sentence. Secondly, they have had little success in using it against our aircraft, infinitely less success than the Afghans had when they used our stingers against the Soviets.

So on content, I am unimpressed. On process, who knows what else is out there? The idea that anyone can release wartime communications from inside our Defense Department in the middle of war is deeply disturbing. If we track that down, who is responsible, they ought to serve a lot of time.

BAIER: Robert Gibbs, White House press secretary said today, Juan, that the Pakistanis -- the president warned the Pakistanis back in March they were, the U.S. was not giving them a blank check and that Pakistan must demonstrate they are rooting out Al Qaeda and violent extremists with its borders. He said not all is going well. However, here is what the state department said back in May:

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: They have basically given us assurances that there are no elements in ISI who are cooperating with the militants, the extremists. We take them at their word. We have no reason to doubt what Pakistan has said. They do not believe there are any rogue elements operating in ISI, and we take them at their word.

(END VIDEO CLIP)

BAIER: The president's spokesman in March of 2009, the president's address there and that is from May of 2009. What do we take from this?

JUAN WILLIAMS, NEWS ANALYST, NATIONAL PUBLIC RADIO: In the case of the ISI, there has been hints along the way of some complicity, but the question, is it current?

Now, General Jones, the national security adviser at the White House, said today that the situation has changed and he is confident of the relationship with the Pakistanis. The blank check idea is not in play. That it's not a case that we are blind to what they are doing in order to keep them as allies. And they are essential allies in trying to find people like Usama bin Laden up in the mountains of Pakistan and root out not only the Taliban but Al Qaeda.

The second part of it is whether or not there's something more to be found in the documents in terms of suggestions, possibly of abuse of people. I don't know if that is the case. There is some hints -- I've just looked at this. And I think that overall, though, for Americans, and especially Americans concerned about the war, I think there is the hope by the people who leaked this that it would turn the American public against them politically, especially given that this very week or so there is a war funding bill being considered on the House floor.

Could this impact public opinion? I think it's pretty clear we don't understand the extent of the damage being done to Americans who are fighting this war and, you know -- but I don't think it will exactly buy the American public, or it will not give the Democrats some kind of insulation that would allow them not to fund the war effort.

BAIER: Steve?

STEVE HAYES, SENIOR WRITER, THE WEEKLY STANDARD: My understanding is of the total collection of intelligence reports there are some 77,000 that have been made public, and there are 15,000 -- give or take -- that have not. There is concern among intelligence officials that in that remaining 15,000 there could be things that are much more sensitive than the things we have seen today. They could include things designed or, that would be released in order to make Americans look bad. They also could include things that would complicate the antiwar message of the WikiLeaks founders, who don't want to be spreading this.

But what I think is interesting, if you take a step back and look at this in its entirety, people see in it what they want to see in it, in terms of its substance. The antiwar people, you know it was leaked to The Guardian and Der Spiegel and they're highlighting things the Americans might have done. People who believe that we should fighting and winning in Afghanistan can point to other things, the deadliness of the tactics of the jihadists.

But what is inescapable is it underscores we are, in fact, in a regional war. And this whole idea we have been debating for a decade of whether Al Qaeda and the jihadist are stateless entities and are not coordinated and they don't have any state backing, seems to me once again, rather definitively, put to rest by these documents, showing Pakistani, the involvement of Pakistan's ISI and showing the involvement of the Pakistan's military --

BAIER: And Iran.

HAYES: And the level of support from Iran. I mean the details about Iran we've know, we've talked about it on the panel several times -- but the details and level of support from Iran is truly alarming.

BAIER: Something tells me we will talk about this again.

The midterm elections are just 99 days away and we will tell you what that means for Democrats and Republicans straight ahead.

And we know a lot of you are online right now. Go to our homepage at FoxNews.com/specialreport. You can watch Molly Line's report on how some Democratic candidates are now embracing gun rights.

We'll be back after this.

(COMMERCIAL BREAK)

BAIER: Ninety-nine days from now the election of 2010 and the balance of power really hangs in the balance for control of that building right there.

Let's take a look at the Senate, the picture right now according to Real Clear Politics, this is an average of all the polls that are out there right now, how it stands right this second -- Democrats 52, Republicans 47, and independent picking up one, that would be Charlie Crist, in Florida. So GOP picks up six, they need 10 to control the Senate. That is as it stands right now according to current polls.

You head over to the House, the Republicans need 39 to pick up the House. Here's -- as it stands right now, it is tougher in the House because there are not polls in all of these different districts, but Real Clear Politics has the average right now: Democrats 203 and Republicans 201, 31 tossup states.

That's what we're looking at with 99 days to go to November, 2010, with a lot big issues being talked about. The biggest of them this weekend is tax cuts, the Bush-era tax cuts and whether they continue. Let's bring back our panel: Steve, let's talk about that.

HAYES: Well, I think the tax cuts are going to be a huge issue and they are going to be a huge issue because those districts that you pointed to, particularly on the House side, the House districts that are going to be in play, that are going to be the most competitive, are districts where Obama didn't fare as well in 2008, obviously. They are going to be the swing districts.

Tax cuts will play huge in those districts at a time when people are concern about the economy, it's the number one issue in every single poll. You hear about it. You ask -- you can actually poll people directly about what they think would stimulate growth in the economy directly: tax cuts versus spending. Tax cuts win. So I think we are likely to see this.

It puts the Obama administration in a really difficult position because, as of right now, you heard Timothy Geithner over the weekend saying, look, we are not going to eliminate these tax hikes -- these coming, built-in tax hikes -- on the wealthy in January of 2011, we're not going to do it. And we aren't really worried that's going to negatively affect growth, which I think very few economists actually believe.

If the Obama administration does not do that, I think they are pushing bad policy, which makes it much more difficult for President Obama potentially to be elected in 2012. If you raise taxes in the middle of a recession, retard growth, and then the president has to run on that, it is not good.

BAIER: Juan, at least four possibly five Senate Democrats are saying all of the Bush tax cuts should be extended -- even the two or three percent on the top end.

WILLIAMS: Right. Now the problem for Republicans here is that Republicans have postured themselves as deficit hawks. So if you are deficit hawk, says someone like Tim Geithner, wait a second, how can you not -- how are you going to pay for the tax cuts because they will have big costs -- trillions of dollars attached to them over a 10 year period.

BAIER: Although 80 percent of the tax cuts for the middle class also would not paid for under the Obama administration.

WILLIAMS: That is right. So the Obama people are saying they are willing to take something of a hit in terms of continuing tax breaks for individuals under $200,000 and couples over $250,000, but not for what you heard Geithner describe as the two percent or three percent of the wealthiest Americans.

But I think the issue number one, as we just heard from Steve, is jobs, jobs, jobs. And so the question is, is the economy producing more jobs at that point and do people think it is necessary for the tax cuts to get the jobs on the table?

KRAUTHAMMER: I think the way Democrats look at this is as most midterms are a referendum on the incumbent president and of course incumbents in the House and the Senate, if it is a referendum on the president or the leadership of the Democrats in the House and Senate, they will be slaughtered. So they want the midterms to be a choice between Republicans and Democrats -- not a referendum.

Now, they're not going to run on health care or financial reform or on stimulus -- that is a dirty word. All the major left-wing accomplishments are not exactly the stuff you want to run on.

Interesting how Democrats have now raised the Bush tax cuts as an issue, the Democrats are doing this, and specifically whether to extend the tax cuts that go to the rich, so-called. The reason I think that is useful if you are a Democrat is it's got two words in there -- "Bush," and "rich."

It is again running against Bush which is otherwise implausible. And secondly it is a class war idea which Democrats still think is a winter. So I think that is the reason it is being raised.

Obviously, it will hurt our economy. You do not want to raise taxes in a recession or raise taxes on the employing class in the middle of a jobless recession. But I think as a talking point to argue in an election, it might actually help the Democrats, or at least they think so.

BAIER: We will do this from time to time. We're on day 99. That's it for the panel.