This is a rush transcript of "Special Report With Bret Baier" from April 6, 2010. This copy may not be in its final form and may be updated.


P.J. CROWLEY, STATE DEPARTMENT SPOKESMAN: We do confront a global movement of terrorists, you know, violent extremists. Not all of the — not all of them are Islamic.

ELLIOT ABRAMS, FORMER BUSH DEPUTY NATIONAL SECURITY ADVISER: I think it makes us appear weak when we are afraid to speak the truth and afraid even to use the term "Islamic extremism."


CHRIS WALLACE, FOX NEWS HOST: Sharply different reactions today from the State Department and a conservative critic about a report that the Obama administration is considering removing religious terms like "Islamic extremism" from the country national security strategy.

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

Steve, the White House isn't commenting on whether or not this report is accurate about a change in the new national security strategy. But if they remove terms like, religious terms like "Islamist radicalism" or "extremism," how much does that mean?

STEVE HAYES, SENIOR WRITER, THE WEEKLY STANDARD: I think it has the potential to mean a lot, because very little matters more in the kind of effort that we have, and I'll call it a war, that we have right now than strategic clarity.

And, you know, the people fighting this war on the front lines get that from the battlefield commanders, but they also get it importantly from the United States, from the White House here in Washington.

And absent that, I think it confuses the situation that was already very confusing. One of the most difficult things about the effort is identifying who we were fighting. At the beginning of the war you had to know we were just going after Al Qaeda, were we going after states that sponsored terrorism? Were we going to go after broader networks of terrorism?

And I think one of the things that the Bush administration did is settle on the thing that most of the groups had in common — Islamic radicalism. That is the reason the term was used.

WALLACE: Juan, I have to point out in the report today by Associated Press, they quoted Karen Hughes, a former top advisor in the Bush White House who ended up running public outreach to Muslim countries for President Bush, and she said that Mideast country often came to see the talk from the U.S. about Islamic jihad as an attack on their faith.

JUAN WILLIAMS, NEWS ANALYST, NATIONAL PUBLIC RADIO: Indeed. It was perceived by many in the Muslim community as you are talking about all Muslims, not just the radicals, not just the people — I describe them as a crazy fringe, and a violent crazy fringe.

But this is a very tricky issue, because contrary to what Steve says, I think that rhetoric really doesn't have that much impact. I don't think it will have any impact on the soldiers and I don't think it has that much impact on our allies.

The question is, if you are the Obama administration, does it have an impact on Muslims around the world? They suddenly say the president of the United States took this step, he took out religious, any religious reference in the national strategic document, I'm not sure they would say, yes, that means that the Obama administration is much more favorably inclined toward Muslims or understands us better.

President Bush was moving in this direction in his time, as Karen Hughes points out. I might also add, Chris, you mentioned the Associated Press report, they cited Ronald Reagan going to China and not talking about fighting communism and repression, but talking about areas where the United States and China could cooperate — education, business, health care — as a way to try to build bridges.

WALLACE: Now again, I want to emphasize the fact this is simply a report of something that is being considered in the national security policy. It's not something the administration announced and they wouldn't comment on it today.

But assuming that they are seriously considering it and might do it, is this much ado about something or much ado about nothing?

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: It's much ado about a lot. It borders on the Orwellian. If we weren't involved in a war against Islamic radicals and jihadism, which is what is, it wouldn't be as tragic.

The commander in chief has just sent 30,000 Americans to fight, and some will die in a battle against whom? Against what? He, himself, has said openly it's about Al Qaeda. What is Al Qaeda? Is it just a gang of violent extremists? What does that tell us? What is their ideology? What exactly are we preventing?

The idea is to prevent it from taking over the region and the entire Middle East. Well, it's openly proclaimed itself as an Islamic movement. That's how it sees itself. Interpretation of the Koran and religion which would impose Sharia law in a violent way on everybody and produce in the Middle East and the world what we had in Afghanistan before the American invasion.

Now that is a specific — it isn't a prejudice of ours or a stereotype of ours. That's the essence of their ideology. And to deny it is absurd.

In Pakistan, we have allies, the moderates in the government and in the army who are now at war with the same jihadists. Do you think the Pakistanis or Muslims are denying that the enemy is jihadism and the imposition of Sharia law? For us to deny is it to say our own allies, the moderate Muslims are deluded.

WALLACE: On the other hand, Steve, we learn today that the Obama administration is taking the extraordinary step of announcing that they are authorizing the targeted killing of an American citizen, the radical cleric Anwar al-Awlaki, who was reportedly involved, linked to Major Nidal Hasan, the Fort Hood shooter, Abdulmutallab, the failed Christmas day bomber.

That is not the action of an administration that is soft on terror when they are targeting an American citizen.

HAYES: And this is precisely why they announced this again today, so that we would talk about this in two ways, say on the one hand they're tough, on the other hand they seem to be politically correct.

This was already announced. This was announced the week after Christmas. They talked about the targeting of Anwar al-Awlaki, gave a tick-tock to reporters at the White House. It was reported at the time.

The fact that they're leaking this again and providing maybe some additional details suggests to me that this is all about positioning them here domestically as tough on terrorism at the same time they are saying they are not going to use the word —

WALLACE: We have about 30 seconds left. Juan?

WILLIAMS: Look, this is an administration that is using drones aggressively to go after terrorists in Pakistan.

And yes, you are right. This had been announced previously. But I think it's being done because they are aware that conservative criticism is going to be you're being politically correct, rather than appreciating the strategic move they're trying to make, which is to build bridges with the Muslim community internationally.

WALLACE: We have to take a break here. You can get more about the administration's national security policies at the homepage at Foxnews.com/specialreport.

Up next, is the White House going to propose a new value-added tax? That's right after we pay some of our bills.



JOSH BARRO, MANHATTAN INSTITUTE: Part of the effort by certain policy wonks in Washington and by the administration is to prepare people for the idea that we're going to have a VAT sometime in the future.

DANIEL MITCHELL, CATO INSTITUTE: That is just a way of spelling state government in Europe, because that's exactly what we have seen happen there.


WALLACE: A couple of think tank experts discussing the latest trial balloon from the White House advisor about the possibility of a big new tax.

And we're back with our panel. So, Charles, I've got to say, you have been suggesting for months that the Obama White House at some point may end up proposing a VAT, a value-added tax, to deal with the huge deficits. Now economic advisor Paul Volcker went on the record yesterday, saying it's time to consider it. Do you feel vindicated?

KRAUTHAMMER: I feel saddened, actually, that this is where we're headed. It's very obvious.

Look, I don't have inside sources in the Obama administration. I'm sure that is a surprise. But it is obvious on the day that health care was signed, we enacted the largest entitlement since the New Deal. We're now reaching levels of the European entitlement state and we are going to have to have European levels of taxation.

Now, how are you going to do it? The income tax is tapped out as a result of Republican efforts. Half of the American people pay zero income tax and you can only squeeze so much out of the other half. We're already going to be raising taxes when the Bush cuts expire.

All that is left is the VAT. That is what happens in Europe. And the reason it's attractive and it's so inevitable is because it creates a river of cash, where one percent is $100 billion a year of revenue. So a 10 percent here would be $1 trillion a year. The Europeans have it at levels of about 20 percent. It's addicting. If you raise it a half a percept or one you get a lot of money and nobody really notices. And the VAT is not quite a sales tax because a lot of it is hidden.

WALLACE: At each part of the production, the manufacturer, the supplier, the manufacturer, the retailer, each one has to add their part of the tax.

KRAUTHAMMER: That's why politicians love it because a lot of it is hidden in the price of the item. Only a bit of is it on the surface as a tax. So I think ultimately it will be enacted. Obama as a candidate would never speak about it and the Democrats up until enactment of health care pretended no new taxes would be involved. It obviously is coming.

WALLACE: But this is politically explosive and, in fact — again, we're talking about Paul Volcker, an advisor, saying it's time to consider this. The White House has said nothing about this.

But a spokesman, Juan, for Republicans launched an immediate attack. Put it up on the screen. Brian Walsh said, "It shouldn't surprise anyone that the Obama White House would advocate a European-style tax to help finance their European-style government health care plan." How politically explosive is this and how good an issue for GOP?

WILLIAMS: It's a terrific issue if you can say we're anti-tax. I think it's a better case to be made for the Republicans than you offered. Kent Conrad from the banking committee says it has to be on the table. You have got to consider a value-added tax given the size of the deficit in the country.

And I think the deficit is what offends most Americans deeply, that we don't pay for things that we —

WALLACE: You don't think paying more taxes would offend most Americans?

WILLIAMS: Yes, but I think this is the deeper. Look, if you are going to be responsible and run government responsibly, tell me. Oh, you want to raise my taxes? Let me vote on that. Or you're going say I'm going to take away the opportunities you have to entitlement, your Social Security, Medicare, Medicaid. Tell me that.

Make the tough decisions. Don't play around and pretend like nothing is going on. And a value-added tax confirms what Charles said, it's a beard.

WALLACE: A value-added tax is a beard?

WILLIAMS: Yes, because it hides the fact that you are raising taxes.

WALLACE: How should you do it? Raise it on income?

WILLIAMS: No, be clear, we are going to raise taxes because we have to pay for these entitlements. We can't run this huge deficit.

WALLACE: Let me just say, folks, if you ever wondered why Juan Williams will not ever seek or get elected to office, you now got your answer to that.

Steve, your thoughts —

HAYES: Or grow a beard.


WALLACE: Your thoughts about the VAT tax both as policy and politics?

HAYES: I don't like the VAT tax but I like consumption-base taxing because in a sense it's elective. The problem is consumption tax should be replacing the income tax, not augmenting it.

I think it will be a difficult issue, perhaps more difficult of an issue than Charles does. I think even if you try to sell it as something that starts small and then creeps bigger, as the taxes inevitably do, that's what happened to the income tax. It was sold us as one-half of one percent on the top one percent of income earners, and now we see where we are now.

But this is the answer for questions that the Republicans asked throughout the health care debate and beforehand with the stimulus debate, how are we going to pay for this? This is the answer. I think Charles is right, it's virtually inevitable. The question is, how are they going to push it and sell in a way that is not as politically toxic as you suggested it is and I believe it is?

WALLACE: We have 30 seconds.

KRAUTHAMMER: They will deny it until elections in November. They'll say we're not considering it. What a crazy idea. Only Republicans and conservatives are implying it's inevitable.

The day after elections it becomes an issue again. The deficit commission will report the president after Election Day, it will be a major recommendation, I assure you.

WALLACE: Do you think Obama will run for re-election with a VAT tax in 2012?

KRAUTHAMMER: He may wait delay until after his reelection because it's toxic, but it's in our future.

WALLACE: Got to go. Thank you.

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