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This is a rush transcript from "Special Report," September 27, 2010. This copy may not be in its final form and may be updated.


PRESIDENT OBAMA: What we need is tax cuts for the middle class people who are struggling and if they get a tax cut they are likely to spend it, which means that a small business is potentially going to get a customer, and we will see job growth.

SEN. MITCH MCCONNELL, R-KY., SENATE MINORITY LEADER: Thirty-one Democrats in the House, five Democrats in the Senate, said they agreed with me that we ought not to raise taxes in the middle of a recession.

REP. JOHN BOEHNER, R-OHIO HOUSE MINORITY LEADER: If we leave here this week and adjourn for the election without preventing these tax increases on the American people, it will be the most irresponsible thing that I have seen since I have been in Washington D.C., and I have been here awhile.


BRET BAIER, HOST OF SPECIAL REPORT: Republican leaders this weekend responding to Democrats saying essentially they will not have a vote on whether or not to extend the Bush era tax cuts before heading off to the election.

New poll out today, the Politico and George Washington University, have the participants in the poll saying Republicans favored by 11 percent. That is the presidential poll, whether they vote for President Obama is at 38 percent. Participants favor Congressional Republicans by 11-point margin over President Obama to create jobs, the next poll there. At any rate, there you see it, 51 to 40.

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

OK, Steve, set the table for us. The president signs this small business lending bill today, says its going to change the dynamic for many small businesses. Republicans say, big picture, it's the tax increases at the end of the year.

STEVE HAYES, SENIOR WRITER, THE WEEKLY STANDARD: The White House is absolutely crazy to be making this argument at this time a Washington-directed bill which will affect some small business owners, but even small business owners say it will not affect many of them, is going to change the economy. It is so myopic it is hard to imagine how they came up with this as the message.

The bottom line is, and Republicans were given a gift. It looks as if there is not going to be a vote on these taxes before the elections. It seems pretty clear.

This is a gift. Republicans can now go to voters and say you had 20 months in office. You spent $1 trillion on a stimulus, $1 trillion plus on health care. You've regulated financial institutions. You've brought Washington into the lives of people on a level we haven't seen in probably 50 years. But the one thing you couldn't find time to do was stop a tax hike on every single American in the country. That is the win thing you did not have time to do.

And this is what Democrats are going to have to defend as they face the Republican campaigns for the next five weeks.

BAIER: We heard some different explanations from the majority leader on FOX News Sunday, Juan, saying it is Republican obstructionism that is preventing a vote, also calling it a "Republican tax increase," which was a bit of political jujitsu for the majority leader. What about all of this and the politics of it?

JUAN WILLIAMS, NEWS ANALYST, NATIONAL PUBLIC RADIO: I just was listening to Steve and thinking, boy, how people can see things so differently, because what looks to me what is going on in Washington is Republicans have said unless we get the tax cuts for the very rich in this country, we are not going to allow a vote to go through that would give a tax cut to everyone who makes $250,000 or less.

And so I thought, well, that is what has been going on, and then you have some Democrats, the 30-plus that you mentioned, who have decided that politically they think it is untenable and so they have taken the Republican position, but that's what's been going on.

I don't think it's a matter -- this is all about job creation and tax cuts. And what we saw today with the small business deal, I would think that Steve and Republicans would be celebrating Barack Obama, the president focusing on job creation in a meaningful way.

But I am listening and I am hearing Steve, say, no, actually this is going to hurt Democrats on the campaign trail. From my prospective, it seems to me that Republicans are the ones who are saying the Democrats kept you from having a tax cut, it is just not credible. I think most Americans will say I don't think that is the story I was hearing.

BAIER: Charles?

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: It looks as if I have to adjudicate between Steve and Juan. You will be surprised I think that Steve has the argument here.

Look, first of all, on the cuts, the reason that Pelosi decided she would not hold a vote is because there was a rebellion in the ranks of Democrats, over 30 Democrats who rebelled and who have opposed her. It was not Republican obstructionism but disarray among the Democrats over an idea of raising taxes in a recession, which is a bad one.

Second, on the issue of the bill that was passed which is $30 billion, essentially thrown away. It's going to have no effect whatsoever on employment or unemployment. It's a way to exert government control over small business.

On the one hand, the taxes on half of all of small business income will go up on the 1st of January, over 10 percent. The government will take the money, and if you are nice, it will lend you some of it back. If you fill out the forms, if you are obedient enough, and you invest it exactly as the government and the loan officer wants.

I think the most interesting number in the poll was less than 40 percent of Americans want to reelect the president. And what is even more interesting is the poll asked the question, if you look at him favorably, and 66 percent do. So you have two to one who like him as a person, and yet about half of those would reelect him.

And that means it is the policies. Liberals are walking around in a cloud assuming it's the economy, it's because he does not emote and all this. That's nonsense. He governed left. It's a right of center country, and that's why they will get swept away in November.

BAIER: Juan, what about the people who criticize the small business lending program, saying that it's not the lending that they are concerned about; it's the business and the economy overall and whether they should be investing in their business and putting money off the sidelines into the business in the face of a really shaky economy that they are uncertain about going forward?

WILLIAMS: I think everyone is uncertain, but clearly what we see from the numbers is the people are sitting on large storehouses of capital that in terms of production --

BAIER: So then lending wouldn't be the issue.

WILLIAMS: It shouldn't be the issue for many companies. But what I am saying is that for small business, the ability to have additional capital that they should be able then to invest in employment would be a big bonus.

Charles says the government is trying to tell people what to do but the government is giving them a tax break, and I think the government would be foolish, if not to say to people here is what we want done to create more jobs for those out of work.

KRAUTHAMMER: It confiscates your money in a tax increase and then it returns it if you are nice with interest.

WILLIAMS: There was no tax increase.

KRAUTHAMMER: There's going to be.

WILLIAMS: Now you admit you are talking speculatively as opposed to what is really happening.

HAYES: It's not speculative, if it is not voted on, if it's not stopped, it will happen. It's going to happen for everybody--

WILLIAMS: Listen everybody, Democrat and Republican agree, everybody who makes less than $250,000 we want a tax cut. And who is objecting to that and says no, we cannot have that.

HAYES: That is interesting way to frame the question. The way to frame the question is you have had 20 months in office as Democrats, you've had all branches of government, basically, and you have not seen fit to stop the biggest tax increase in American history because you want, because you are so dedicated to redistributing wealth that you will not stop what is an obvious -- it's an obviously going to be bad for the economy.

The president himself said we should not raise taxes in a recession, and, yet, this he is going to do it allowing it to happen. That's not leadership from Washington.

WILLIAMS: We can talk more about this, but I think deficits are part of the consideration, paying for that tax cut--

HAYES: This is the problem the president faces, right now is he has to convince people if he wants to win the tax cut argument that he is now, after $1 trillion in stimulus and $1 trillion in health care, he is now so concerned about deficits that what he has to do is block this tax increase for the rich,or block this tax cut for the rich.


BAIER: Steve Hayes, brought to you by Red Bull.


Thank you. This has been good, Charles is just watching.

KRAUTHAMMER: If I was a referee I would have stopped the fight--

BAIER: You had to let it go.

Logon to our homepage at FoxNews.com/specialreport for a web exclusive, a look at the Iraq election six months later. Next up for us, the Obama administration versus the Bush administration on wire tapping.



GREG NOJEIM, CENTER FOR DEMOCRACY AND TECHNOLOGY: Wiretapping and electronic surveillance are already at record levels. What the FBI has proposed will make wiretapping even more prevalent and more common.

THERESA PAYTON FORMER WHITE HOUSE CHIEF INFORMATION OFFICER: It is really important for law enforcement to have this as a tool in their toolbox to be able to use. When human lives are at stake, we want to be able to in a very quick fashion be able to get as much evidence as possible to figure out who is at stake and what's going to happen and where it might happen.


BAIER: That is a former Bush administration official making the case for the Obama administration and what are reported to be draft legislation efforts to give the government better access to your electronic communications, essentially wiretapping on the Internet and social networking.

This is what the ACLU has just put out about this legislative council - - "Under the guise of a technical fix the government looks to be taking one more step towards conducting easy dragnet collection of Americans most private communications. Mandating that all communications software be accessible to the government is a huge privacy invasion.

What about this? We're back with the panel. Charles?

KRAUTHAMMER: I am uneasy with the administration's idea and not quite for those reasons of the ACLU. Look, if it were only a grant of authority I would be OK with it, because I think our system has checks and balances, independent judiciary oversight. There was a lot of screaming by Democrats about how the Bush administration tore up the constitution and destroyed our privacy. It did not when it tapped the phones.

But what the proposal here is about is not a grant of authority. It's changing the nature of the Internet. It would impose a mandate on the software companies to put in doors through which a government, it could be any government, not only our government, which I trust, but China and India and other places. It will change the nature of the Internet which is now were much more anonymous than stuff like phones.

And I think on balance it will make it extremely easy for dictatorial regimes to invade privacy and squash democratic movements. I think overall it is a net minus, and I think the administration is treading into water it really shouldn't. This would change the nature of the software and the actual technology.

BAIER: Juan, we saw the one page release from the ACLU. We haven't really seen any other reaction. Not a lot of folks are covering it that greatly. You look back to 2007 when the story came out in "The New York Times" about wiretapping under new law in the Bush administration. You look at the things that they are talking about, the ability to unscramble encrypted messages. This is from the current proposal.

What about this in comparison to the coverage back under the Bush administration?

WILLIAMS: I think obviously there was a lot of bucking when this thing first came into as a possible description from the Bush administration, especially encroachment on civil liberties. This time I think it is seen as simply extending that same position. I think that might explain why you are not getting -- but it was to my mind the lead story in several newspapers this morning.

So people are paying attention. But I think the question is, given the terror threat, how serious do you take it, and should the government have this ability? I think most Americans are going to say "yes," but they will be very upset about the idea that someone could monitor what wouldn't be anything but private communications.

BAIER: Do you thing the outcry is equal?

WILLIAMS: Is equal? I think it will not be. Obviously, we have been through this argument now once before in terms of what the Bush administration prescribed and I think especially with regard to telephones and telecommunications. And in that case, part of it had to do with getting the telecommunications company agree to give people this information without having said, you know, your phones may be wiretapped.

BAIER: Steve.

HAYES: I think Charles made the critical distinction. It is less about tapping things that already exist and it is more about the government mandating this new software sort of being built in.

The difference I have with Charles is that I am not only concerned that it could be misused by dictatorial regimes or China or India or whomever, I am concerned about our government. I don't trust our government to use it this way, especially if you have the government from the outset mandating that all of these software companies build this in to their products.

First of all, I am not sure that is constitutional. Secondly, I have a problem -- I don't know that our government would use it for the ways it was intended and that successive administrations and bureaucracies could be counted on.

KRAUTHAMMER: But we have a track record. In the Bush years people spoke of the scandals, the assault on the constitution. There were no scandals. It was used in a very specific and controlled way, and I think it was a success for that reason.

BAIER: It was also used as a political football.

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