This is a rush transcript from "Journal Editorial Report," January 12, 2013. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: This week on "The Journal Editorial Report," if you thought Democrats were done raising your taxes, think again. The president and his allies in Congress are planning their next big tax increase. We'll tell you what's on the table.

Plus, President Obama unfettered. What his treasury pick and new national security team say about the president's world view and his agenda for the next four years.

Welcome to "The Journal Editorial Report." I'm Paul Gigot.

That didn't take long. Fresh off the biggest tax increase the country has seen in 20 years, the Democrats are planning their next revenue grab. Senate Minority Leader Mitch McConnell declared the tax issue over this week, saying it's now time to focus on Washington's spending problem. But President Obama insists any cut must be accompanied by more tax revenue. And House minority leader, Nancy Pelosi, says future tax hikes are not off the table.


HOUSE MINORITY LEADER NANCY PELOSI, D-CALIF.: The president had said originally he wanted $1.6 trillion in revenue and he took it down to 1.2 as a compromise. In this legislation will get $620 billion, very significant, high-end tax, changing the high-end tax rate to 39.6 percent, but that's not enough on the revenue side.


GIGOT: Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; editorial board member, Mary Anastasia O'Grady; and Washington columnist, Kim Strassel.

Kim, before we get to the next tax increase --


-- I want to inform our viewers about the stealth tax increase, eliminating some deductions and exemptions for taxpayers above $250,000, not $400,000 as the --


GIGOT: -- advertising and political spiel on this deal suggested. How did this happen?

STRASSEL: This was stuffed in there. It was a revenue grab by Democrats. Just a little taste, Paul, of what they would like to do in terms of further closing deductions and loopholes for the wealthy. But the technical term for these are pets and peeves. And what they are basically is they phase out the ability of deductions for higher-income taxpayers.

And as you said, came in as a much lower threshold than those marginal income tax hikes that were the subject. Thrown in there, dead of night. It was something Democrats demanded and managed to add to the amount they can claim in revenue.

GIGOT: But $150 billion of the $620 million tax increase are going to come from the provisions.

STRASSEL: Exactly.

GIGOT: So they're very, very significant. And a lot of taxpayers will have a big surprise next April.

Mary, here is the question. We had the big tax increase. It's significant. The president won. Let's face it. He really got what he wanted. So, why do we need more revenue? I thought this was going to solve the deficit problem?

MARY ANASTASIA O'GRADY, EDITORIAL BOARD MEMBER: Paul, if you look at 2011 IRS statistics, about 2 percent of the U.S. households earn $250,000 a year or more. If you took all of their income, you would run the government for less than half a year. All right, there's just no --


GIGOT: On every dollar they earn?

O'GRADY: Exactly. And there's just not enough money in the rich to pay the bills that we have. And so, you know, I think Howard Dean has admitted this. Many people who are Democrats, who are outside of elected office, have admitted this. And we all know that, you know, eventually they're going to go after the middle class. And as Kim says, one of the ways they've already decided to do this is going -- using the limiting deductions. And in fact, I should add that people earning -- couples who earn $130,000 each, individually, fall into this category where they start to lose deductions. This isn't exactly rich people, particularly if you live in New York.

GIGOT: If they're joint filers, it's over $250,000 threshold, and when it begins to phase out.


HENNINGER: Paul, the Democrats believe, this generation of Democrats believe that over the last 40 or 50 years the United States made all of these social commitments to the population -- Social Security, Medicare, Medicaid, now Obama-care.

GIGOT: Well, we have.

HENNINGER: And -- we have. And they think -- the conventional wisdom, the Simpson-Bowles type argument is that we can't afford this, that out, 25 years from now, all of our taxes will be going to pay for these things. The Obama Democrats believe we made these commitments and we have to find a way to pay for them. They do not want to cut the spending. And so, U.S. spending, which has been about 20 percent of GDP since 1969, I think, they're trying to get it up to around 24 or 25 percent of GDP. We keep repeating this number. But in a $15 trillion economy, every percent of GDP is a tremendous amount of spending. But tax revenue, the last three years, has been down around 16 percent of GDP. That's a tremendous gap.

GIGOT: But part of that --

HENNINGER: And they want to raise taxes to close that gap.

GIGOT: But part of that reduction -- normally, it's about 18, 18.5. And it's popped up under Bill Clinton's presidency above 20 percent, when you have real economic growth.

HENNINGER: If you have economic growth.

GIGOT: The 16 percent is because the growth is so --


O'GRADY: Well, that's what I was -- yes. Well,

HENNINGER: Their policies are going to guarantee, in my opinion, 2 percent growth for a long period of time. They will never get tax revenue back up towards 20 percent.

GIGOT: Kim, let's talk about another tax that's on the table. Dick Durbin, the number two Democrat in the Senate --


GIGOT: -- this week, said raise the prospect of an energy tax in addition to this. And this reflects part of the point that Mary made, you can go after the rich under the current tax, but you can't begin to finance the government we have. So ultimately, you've got to find new ways to get the revenue. Is this energy tax actually going to be a live prospect in the next couple of years?

STRASSEL: Oh, they're going to try it. And I think we all owe Dick Durbin a degree of thanks for being so honest about what they want to do.

GIGOT: Yes, I agree.

STRASSEL: As Mary said, you can go after everybody that is rich, you can't get it. So you will have to go up through the middle class. The problem for Democrats is they have vowed they're not going to raise income taxes on the middle class. Instead, what you have to do, you have to go after a product that everybody uses, that's essential to everyone's life.

You do it with energy. You tax electricity. You tax gas. You tax oil for your heating in your home. This would be a huge hit to the economy. But they are going to try to do it. They may try to do it as a guise, for instance, of a carbon tax, so they look as thought they're being environmental in this process as well, too. But it's going to be the quickest and easiest for them, they think, way to try to slip a broader tax on the middle class into the discussion.

GIGOT: Mary, how should Republicans respond to this?

O'GRADY: This is what happens when you have politicians who never think about growth, as Dan was saying.

I mean, I think the way they should respond to it is a larger economy needs more revenue for the government and more jobs for people and more prosperity and a happier society. And --


GIGOT: What about trading an energy tax for lower income taxes, Dan?

HENNINGER: I think that's probably -- they'll do something like that. A carbon tax, I would think maybe, in return for lowering payroll taxes.


GIGOT: You're saying the Democrats will propose this or --

HENNINGER: I think the Democrats would propose it.

GIGOT: Oh, I see.

HENNINGER: Carbon taxes are extremely unpopular politically. Remember Bill Clinton's 1993 BTU tax?

GIGOT: Right.

HENNINGER: Some Democrats say he lost the House in 1994 because of that.

GIGOT: All right.

When we come back, President Obama unfettered. From his new national security team to his pick of Jack Lew as treasury secretary, what the president's cabinet makeover says about his plans for the next four years.



PRESIDENT BARACK OBAMA: Jack knows that every number on the page, every dollar we budget, every decision we make has to be an expression of who we wish to be as a nation, our values.


GIGOT: That was President Obama Thursday, nominating White House chief of staff, Jack Lew, as his next treasury secretary, replacing Tim Geithner, who is set to step down at the end of the month.

So, Kim, tell us about Jack Lew. Who is he, what does he believes?

STRASSEL: Well, he's mostly -- I think, this is important -- a creature of Washington. He had a brief interlude out at Citigroup, but he's spent a lot of time working in a political capacity. And that does, in fact, make him a much different creature for a position like the treasury secretary than we have in the past. Folks who have come from that often out of the business world, established economists, might come from the Fed. This is a person viewed by Congress and many -- by many people here in Washington a more of an ideologue and a political guy. And he's now been put in that post.

GIGOT: His reputation, Kin, has changed over the years. When he was with the Clinton administration, I know Republicans thought he was an honest liberal, somebody they could do business with. But he's really emerged under this president as much more partisan and implacable. Bob Woodward records this in his book about the budget fight. Tell us about that.

STRASSEL: Yes, it is very notable. Mr. Lew makes a lot of appearances, and almost always in the role as the guy as, just when you see Mr. Obama and Boehner making some progress during that debt limit fight, he's the guy who comes and throws the monkey wrench and screaming that the president needs to get more, and pretty much tanking the negotiations.

That makes him poison for a lot of Republicans. And that's a problem in his capacity as treasury secretary, which sometimes does need to work with Congress.

GIGOT: Very different choice, Mary, than most treasury secretaries.

I remember Reagan had Don Regan first and Jim Baker. Bill Clinton had Lloyd Bentsen and then Bob Reuben of Goldman Sachs. This is a very political Washington-oriented pick.

O'GRADY: Yes. One of the things I find troubling about Jack Lew is not so much -- I mean, his ideological leanings are obviously going to reflect those of the president. But the treasury secretary should have a vision of what the largest economy in the world wants to do --

GIGOT: Still.

O'GRADY: -- wants to do in terms --



O'GRADY: But wants to do in terms of a vision, an international vision. And Jack Lew has a -- basically experience keeping the books. Even when he was at Citibank, you know, his job was sort of an operations manager, even though he got a huge bonus right on the heels of the big bailout. But he doesn't have the experience of someone who could lead in terms of the U.S. economy, its role in the world, on the international stage. I find that troubling.

HENNINGER: But Barack Obama is not thinking in any sense in traditional ways about the treasury secretary or these ideas about the economy. To them, the economy is a veil, a kind of concede. Its job is to send revenue to Washington. And they have argued that Lew's expertise in fiscal matters is what we need right now, not expertise in marketing.

GIGOT: Because he was a budget director --


HENNINGER: Right, because our problems are fiscal problems right now. And I think that essentially what Barack Obama has here is not the treasury secretary who represents the economy or Wall Street, but he would call him a treasury secretary for the middle class. In other words, he's part of this much more populous middle class idea that Obama is pushing right now. And I think that's what Lew's job is going to be, to help Obama, as I said in the previous segment, get spending up to this level that needs to support the middle class.

GIGOT: Here is what I always think it means. The grand bargain, the grand budget bargain is dead. There will not be a grand bargain. Tax reform for the next two years, probably dead. What we're going to have is trench warfare. And on spending, fight after fight after fight and really no bipartisan agreement. And Jack Lew is the kind of guy you pick if you want him to be basically your trench-warfare general.


O'GRADY: And the not much discussion about growth.

GIGOT: No, I don't think so.

All right, when we come back, the president's national security team is also getting a makeover. And at least one of his picks all but guarantees a confirmation fight. What the Hagel hearings will tell us about foreign policy in a second Obama term, next.


GIGOT: Some other big cabinet announcements this week, with President Obama nominating former Nebraska Senator Chuck Hagel as defense secretary and White House counter-terror chief, John Brennan, to run the CIA. The two join last month's choice, Massachusetts Senator John Kerry, to replace Hillary Clinton as secretary of state.

We're back with Dan Henninger. Wall Street Journal foreign affairs columnist, Bret Stephens; and editorial board member, Matt Kaminski, also join the panel.

And, Matt, first term, we had Leon Panetta at CIA, Bob Gates, a carryover from the Bush administration at defense, and Hillary Clinton as secretary of state. Very different choices in mindset and stature than these three. What defines this new team?

MATT KAMINSKI, EDITORIAL BOARD MEMBER: I think it's pretty much defined by a couple of things. One, they're much more dovish across the board in terms to their approaches to -- should America be involved in the world beyond, how assertive should we be. Chuck Hagel, especially has, throughout his career in the Senate and afterwards, almost an neo- isolationist viewpoint that we, you know, we --


GIGOT: Despite being a Republican.

KAMINSKI: Absolutely. I think that's what's misleading here, in a way. He doesn't agree with the mainstream Republican Party. He's being put forward as a bipartisan sort of pick. But throughout his time in public office, he has said that we cannot shape events overseas, that we shouldn't get embroiled in the problems in the Middle East, we shouldn't challenge Russia or China on human rights or democracy. And I think John Kerry is pretty much the same way.

GIGOT: Right.

KAMINSKI: Which is different even from Hillary Clinton, who has, at times, been much more hawkish.

GIGOT: Yet, the White House would respond and say, look, John Brennan led the counter-terror effort inside the White House that's gone effectively after Osama bin Laden and Anwar Awlaki and other terrorists around the world, so don't lay on this neo-isolationist business on us.

It's not fair.

BRET STEPHENS, FOREIGN AFFAIRS COLUMNIST: I think in the case of Brennan that's not a controversial pick. You can have your quibbles with a number of things that Brennan has done in his career, alleged to have done, but I think as CIA picks go, he's a fairly solid pick.

The real issue has to do with Chuck Hagel. Now, it's not entirely true that Hagel has always had this contrarian profile. Actually, there's a great deal of political opportunism in his career. You might remember in 1997, the Bird-Hagel Amendment, adamantly opposing the Kyoto Protocol in 1998. He was one of the people who was pushing Bill Clinton --

GIGOT: That's the global warming --

STEPHENS: Exactly.

GIGOT: -- agreement.

STEPHENS: In 1998, he was one of the Republicans pushing Bill Clinton to deploy ground troops to Kosovo. But it's true that in the last eight or nine years, he's developed a very dovish persona. Putting him not just to the left of the Republican Party, but putting him to the left of President Obama's own stated positions when it comes to countries like Iran.

GIGOT: Really?

Well, I guess a lot of people would say, well, fine, this reflects, these choices reflect President Obama's world view. He won the election.

Shouldn't he get those choices?

HENNINGER: Well, perhaps, except that his world view includes, I'm convinced, the idea that spending on defense has got to fall and that that money has to be reprogrammed into domestic spending. The defense budget is about $600 billion, more or less. And post war, it's been about 5 percent of GDP. Conservatives argue it should now be about 4 percent of GDP. I think Chuck Hagel's job is to start pushing that number downward, and that's because Barack Obama wants it to fall after Iraq, after Afghanistan.

And then, as Democrats have wanted for 25 years, spend that money on domestic education and energy and --


STEPHENS: And, of course, as the Europeans have discovered, you can only take so much money from defense and put it into entitlements.

HENNINGER: I think they believe that.

STEPHENS: And eventually, you end up both bankrupt and defenseless. The Europeans can afford that because they have the Americans behind them. Who do we have behind us?

GIGOT: Right, but here is the question that I have politically. The president knows, because this was floated and you've written two critical columns about Chuck Hagel, and a lot of other people have as well. Republicans have -- some Republicans have come out and said they won't support him. Chuck Schumer, the New York Democrat, said, well, I want to hear his record. And he hasn't come out and said he'll vote for him. So, why would the president court a confirmation fight in this manner?

STEPHENS: You know, I actually think there's a psychological element. He wanted Susan Rice as secretary of state. She was --

GIGOT: U.N. ambassador.

STEPHENS: The U.N. ambassador. She was heavily criticized, including by me and various others. She withdrew her name. And I think he was simply determined that he wasn't going to be pushed around again, that he was going to pick Hagel. Also, he has a friendship with Hagel that goes back --

GIGOT: To their Senate days.

STEPHENS: -- for several years. So I think it -- a lot of these decisions aren't just simply ideological or policy decisions. There's a personality aspect.

GIGOT: Do you think he wants a fight?

KAMINSKI: I think he's had a fight. I think it's probably a fight that he thinks he can win, because he's probably calling over to the Senate and counting votes.

GIGOT: Sure.

KAMINSKI: What is striking to me as well, Hagel doesn't have experience in the thing he's being tasked to do, which is to run the Pentagon. President Obama is the one who ultimately will decide, well, we're not going to get involved in Syria. We're not going to push too hard overseas.

GIGOT: But the argument --

KAMINSKI: Hagel's main job is to go and run the Pentagon.

GIGOT: But the argument is he was an enlisted man in Vietnam, served with distinction, two Purple Hearts and, therefore, he knows what it's like to be an enlisted man, fighting on the ground and, therefore, will have those people foremost in mind.

KAMINSKI: Well, no one is questioning his courage or his record. But it's not that relevant to the job of running a department of several million people and a $550 billion budget. And he has never served on the Armed Services Committee in the Senate. He has never run anything as big as the Pentagon. And I think he's presumably someone the White House thinks is going to do what the White House wants him to do. Leon Panetta and Bob Gates before were willing to push back at times against cuts that they wanted forced on the Pentagon.

GIGOT: Yes. And I think -- but I do think he will be confirmed, lest we learn something new.

We have to take one more break. When we come back, "Hits and Misses" of the week.


GIGOT: Time now for "Hits and Misses" of the week.

Kim, first to you.

STRASSEL: Paul, a big miss to Vice President Joe Biden's announcement this week that President Obama may use an executive order to enforce gun control in this country. The only reason the president would be considering doing this is because he knows there is a big bipartisan coalition of Republicans and Democrats representing their constituents who firmly oppose such measures. Congress has always been the place to regulate guns. And the public deserves at least that much oversight and debate on an issue that the Supreme Court has said is a constitutional right.



KAMINSKI: This is a hit to Florida Senator Marco Rubio, who, in our pages today, has announced that he wants to lead the fight for comprehensive -- well, not comprehensive, but for immigration reform --

GIGOT: Immigration reform.

KAMINSKI: -- in the coming Congress.

GIGOT: Among Republicans.

KAMINSKI: Exactly. And he has been, of course, a very prominent Cuban-American politician. Came out two years ago. He's slowly moved into immigration. But now says he's willing to take up President Obama's challenge to do something about immigration by proposing a series of bills to overhaul the guest-worker program. And the most -- the hardest thing of all, something about the undocumented immigrants.

GIGOT: All right. Thanks, Matt.


STEPHENS: This is a big hit to journalists in China. We sometimes talk about courage in journalism. These guys are courageous. They responded to censorship by the Communist Party by going on strike and the Communist Party essentially relented. They're all going back to their jobs this week. Maybe there will be some progress for press freedom in China.

GIGOT: And maybe they won't all end up in prison. We have to hope.

OK, that's it for this week's show. Thanks to my panel and to all of you for watching. I'm Paul Gigot. And we hope to see you right here next week.

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