This is a rush transcript from "Hannity & Colmes," July 17, 2008. This copy may not be in its final form and may be updated.

SEAN HANNITY, CO-HOST: And welcome to "Hannity & Colmes". We're glad you're with us. I'm Sean Hannity and we get right to our top developing story.

Senator Barack Obama is defending his wife by attacking little old me, Sean Hannity. In an interview with "Glamour" magazine Senator Obama was asked how he felt about criticism of his wife.

He responded, quote, "It's infuriating, but it's not surprising because, let's face it, what happened was that the conservative press, FOX News, and the National Review, and columnists of every ilk, went fairly deliberately at her in a pretty systematic way, and treated her as the candidate in a way that you just rarely see the Democrats try to do against Republicans.

Video: Watch part 1 of the interview | Part 2

And I've said this before, I would never have my campaign engage in a concerted effort to make Cindy McCain an issue, and I would not expect the Democratic National Committee or people who were allied with me to do this, because, essentially, spouses are civilians.

They didn't sign up for this. They are supporting their spouse so it took a toll. If you start being subjected to rants by Sean Hannity and the like, day in and day out, that'll drive up your negatives."

So let's get this straight, Senator. Your wife campaigns for you, does public speeches, and says things like she's finally proud of her country, and that America is a downright mean country in 2008, and she should be immune from criticism?

And joining us tonight with reaction to this developing story, FOX News contributor Karl Rove.

Karl, how should I interpret this?

KARL ROVE, FORMER BUSH ADVISOR: Well, you know, look, I have a certain sympathy for where Senator Obama is coming from. He's right, spouses are civilians, but if spouses get involved in the process and begin to make explicit political statements like the ones that you mentioned from Michelle Obama, they're intruding into the process.

They can't say I'm a civilian and then become involved in the process by making policy statements. I mean, look, she said she wanted to — to rip Bill Clinton's eyes out at one point. You know you mentioned the article where she — you know, we're — our nation, our country, is just downright mean. We're guided by fear. We're a nation of cynics, sloths and complacents.

We've become a nation of struggling folks who are barely making it every day. It's getting worse over my lifetime and, doggone it, I'm young. I mean these are the kind of things that cross the line between the appropriate role for a spouse and an equally appropriate role for a spouse being a political actor on the stage, but if you decide to become a political actor, then the things that you say and you do become subject of public scrutiny and comment.

HANNITY: Yes, and I want to be clear about this because there's a liberal talking point out there that she said really proud of my country. She did say that one time, but another time she said, "For the first time in my adult life, I'm proud," you know, "of my country."

ROVE: Right. Right.

HANNITY: But I think, once she's injected herself into the campaign, and she — if she thinks, and she wants to be first lady, that America is a downright mean country, if he talks in front of his millionaire friends about bitter Americans clinging to guns and religion, I personally think that's fair game, because they're going to represent all of us in the end.

Isn't that right?

ROVE: Yes. Right.

Look, every presidential spouse is going to be subjected to scrutiny. I mean, look, Cindy McCain's — you know, her ownership of a beer distributor, you know, whether or not she paid the taxes on her elderly aunt's condo in California, what are her income taxes — these are all matters of public speculation. So is Michelle Obama's, you know, dissertation at Princeton and her job as a lobbyist for a hospital.

That's always going — the press is going to look into that.

HANNITY: Yes.

ROVE: But she did invite scrutiny of her views and values by injecting them into the campaign. I mean these.

HANNITY: Yes.

ROVE: And I understand where he's coming from, and I'm very sympathetic to it.

HANNITY: Sure.

ROVE: But the best answer for her, if he doesn't want her to be commented on.

HANNITY: Yes.

ROVE: . is to have her make comments that are not controversial in the way that these other comments have been.

HANNITY: Well, I want to say, he also said in this very same article, you know, that the problem is rarely do these folks ever have the guts to say it to your face.

Senator Obama is welcome on this program. I'll give him — I'll let him co-host my radio show for three hours, he can be here, I'll let him fill in for Alan one night for a full hour.

ALAN COLMES, CO-HOST: But you get the say in that?

HANNITY: I get the say.

COLMES: I'll take it.

HANNITY: I'll let him have — I'll even throw in "Hannity's America" for an hour.

Every — I am not ashamed of anything I've ever said. I think we've asked some very tough questions, but this is the most important job in this world, and it seems to me, and maybe this is unsolicited advice to Senator Obama, and that is, Senator Obama, you know, you singled me out, and I want to give you advice.

It seems to me that if you want to be taken seriously, he needs to be — be acting like a statesman. He needs to be acting presidential. Do you agree with me?

ROVE: Well, you — you make an interesting point, Sean. I think that he hyperventilated in this article. The best way to deal with this would be to be low key about it, and the best way for the issue to go away is for her not to make additional comments.

Look, if she — if the last thing that she said were the things that she said in March, in April, in May, then by July, and August, and September, you know, the issue would be diminished and people would no longer be talking about it.

But this was hyperventilation, I mean, to suggest that she has a right to say these things and nobody has the right to be critical of her about it, is I think...

COLMES: Hey.

ROVE: ...a step too far.

COLMES: Hey, Karl, I didn't hear her say anything about policy. I heard her make statements that, I believe, were mischaracterized. And she went on to clarify what she meant. She meant in terms of the political process. A lot of people make big statements and I think should have an ability and a right to clarify what you say in the heat of the moment.

ROVE: Yes.

COLMES: John McCain to Sean Hannity said, I really didn't love America until I was deprived of her company.

Now, I don't, for a minute, believe that John McCain didn't love his country prior to being held captive, but I don't think.

ROVE: Yes.

COLMES: . we should believe that Michelle Obama was never proud of her company by the same token.

ROVE: Well, look, Alan, here's the point. We can have a legitimate - - disagreement about whether or not she meant what she said when she said it. But the point is is that, in order to stop the controversy, two things need to happen. She ought to not say additional things that are of that controversial nature, and he ought not to continue to pour gasoline on the fire so that we revisit this.

If he had said to "Glamour" magazine, you know what, that's been asked and answered, you know, I didn't like it, I'm concerned about my spouse, blah blah blah, this thing would — they would not have hyped this for an October — an article that's going to appear in October, they'd not be hyping it in July.

But the fact that he not only came back and said, you know, not only am I upset about it, but I'm now going to pick up some people and really take the wood to them, reenergizes the whole controversy.

We wouldn't be talking about this if he had not.

COLMES: Well, I think.

ROVE: . if he had not poured gasoline on a small green fire.

COLMES: A lot of people see a guy standing up for his wife. You know you've got Michelle Malkin referring to her as his bitter half, "National Review" calling her "Mrs. Grievance." There are rumors of a tape which he talks about whitey?

Do you know anything about that — this alleged in tape that's out there?

ROVE: Yes. Not anything — but, Alan, let me go back. I read the "National Review" article. It is a reasonable response to a series of statements. I mean she gave a speech in February in which she told people don't go into corporate America.

Well, you know, she had good sentiments which were, you ought to think about being a teacher, you ought to think about serving your community.

COLMES: Right.

ROVE: She could have said those things without taking on people by saying, I'm going to diminish people who go into corporate America.

Again, this is the point, is that she can say things in a way that's positive and optimistic, or she can say things — you know, I'm proud of America. Not I'm proud of America for the first time in my adult life.

COLMES: Well.

ROVE: She could.

COLMES: You know what she meant.

ROVE: She could say, you know what? We want to encourage people to become teachers and social workers. She doesn't say don't go into corporate America.

COLMES: And to you.

ROVE: And that's my point.

COLMES: Do you know anything about this alleged tape that exist with her referring to whitey?

ROVE: No, in fact, I saw on the Internet that I supposedly am in possession of the tape. But I.

COLMES: That's what I read.

ROVE: But didn't I give it to you?

HANNITY: No. By the way.

COLMES: No, I don't think I have it.

HANNITY: No, they actually said I had the tape.

(CROSSTALK)

COLMES: Does Karl Rove — Karl Rove knows nothing about this, huh?

ROVE: Know nothing about it.

COLMES: All right.

ROVE: And I would find it hard to believe that such a tape exists.

COLMES: All right. We're going to come right back. Now you're on the record of saying that.

(COMMERCIAL BREAK)

COLMES: Karl Rove has words of wisdom for John McCain and Barack Obama. In a "Wall Street Journal" editorial, he paints the current Fannie Mae/Freddie Mac crisis as an opportunity for both candidates to distinguish themselves on the key issue of the economy.

More importantly, he thinks the rewards could be huge. The first candidate to endorse an effective policy may just capture the election.

And for more analysis we now continue with Karl Rove.

Has John McCain even articulated a vision on the economy?

ROVE: Sure, he has. Prosperity through lower taxes, less spending, less regulation, more trade liberalization, by retraining — helping retrain people in struggling states and economies where the jobs are going away.

COLMES: Same thing Obama has done.

ROVE: Well, I'm not certain that when it gets down to lower taxes, less government, no earmarks, liberalized trade agreements, that I've heard that from Senator Obama.

COLMES: Lower taxes for everybody who is not making 250 a year or more. But — and.

ROVE: You know, Alan.

COLMES: . lower taxes for people 50 grand — go ahead.

ROVE: Alan, you've got a good point there. There is a difference between Senator Obama and Senator McCain. Senator Obama believes that the government ought to be able to take as much as it thinks it needs from anybody.

Senator McCain believes there ought to be a limit to how much the government can take from anybody, and he believes — let me finish — he believes that today with the federal tax rate at 35 percent that that's more than the government ought to be taking from any individual regardless of how much they make.

COLMES: But you're — Obama doesn't believe that. He would lower taxes for the middle class.

ROVE: No, he won't.

COLMES: He would have no taxes for the elderly.

ROVE: No, he wouldn't.

COLMES: . who make 50,000 or less.

ROVE: No, no, no.

COLMES: He.

ROVE: He wants to raise the upper tax rate from 35 percent to 39 percent which means that people would be paying 39 percent federal income tax, 14 percent Social Security tax, and 2 percent Medicare tax, which means they'd be paying over half of their paycheck in taxes to the federal government.

That's not counting state and local taxes including.

COLMES: Only if in income taxes.

(CROSSTALK)

ROVE: But, Alan, in America we believe there ought to be limits on government. We believe that the government that can take everything from somebody can take everything from everybody. And there ought to be a limit.

COLMES: It's not everybody — but that's not his plan, Karl, and you know that's not his tax plan. You keep — you people on the right.

ROVE: I will — I've just.

COLMES: . keep saying he's going to raise taxes as if.

(CROSSTALK)

ROVE: Alan, I've just outlined his plan that he's in favor of. He wants the top bracket to be — which is today 35, when in — 2011 he wants that tax cut to expire and that bracket to go to 39 percent. He is right today, the Social Security tax is 7 percent on the individual side, 7 percent from the employer, that's 14 percent tax.

He wants to raise that so that everybody pays that up to $102,000 a year, and then again from $250,000 up, so that's another 14 percent tax, and there's a 2 percent Medicare tax on top of that. That's his plan.

HANNITY: And let me add to that. He would eliminate the Bush tax cuts, families of four making $50,000 a year. They were saving $2,500 a year themselves. FICA taxes, as you point out, capital gains he's going to double, the top rates he's going to raise, windfall profit tax.

ROVE: State tax comes back.

HANNITY: . corporate taxes.

ROVE: Yes, and the family making a tax cut today at $2,500, he says he's going to give them back $1,000 of the $2,500 he's going to collect.

HANNITY: Yes.

ROVE: It will be a net tax increase of $1,500.

But, Alan, again, there's a difference. I grant you there. We can argue about the details all day long, but there's a big difference between these men. One of them says there ought to be a limit to how much the government takes from any one individual, and the other says, look, the more you make, the higher percentage it ought to be.

And there are — and look, most Americans, you know, the Tax Foundation does an annual study. 71 percent of the American people think that the federal government should take no more than 20 percent of anybody's paycheck no matter how much they make.

HANNITY: Hey, Karl.

ROVE: And today we're taking 35 percent.

HANNITY: And it would be up, as you say, around the 50 percent rate.

(CROSSTALK)

HANNITY: Right.

ROVE: 39 income tax, 14 Social Security, 2 percent Medicare.

HANNITY: And then state, local, federal on top of that.

ROVE: Right. Right.

HANNITY: All right.

ROVE: State local.

HANNITY: Karl, let me ask you. I've been saying all week on this program that — and most Americans are angry over the high price of gasoline. I've used the term — I think this is a clear and present danger to the United States. I've said it all week. I believe that we are on the verge, potentially, of an energy war, especially with political instability in the Middle East.

And Nancy Pelosi said they're not going to have a vote on whether or not we can have offshore drilling or exploration. Barack Obama says no nukes, no coalmining, and no refining, no drilling.

So my question is, can this become the or a big defining issue in the campaign?

ROVE: Oh yes. Look, on the domestic front, I think, they're going to be. Spending is going to be a big issue, taxes, big issue, energy, bigger than both of them, and housing is going to be a big issue, as well. Hence my op-ed today in the "Wall Street Journal."

HANNITY: And by the way, I read them all the time, and they're very well put together.

Karl Rove, the architect, thanks for giving it to Alan, I appreciate it.

COLMES: Gave what to me?

HANNITY: The.

COLMES: Nothing. Unscathed.

HANNITY: Thank you.

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