This is a rush transcript from "Hannity & Colmes," January 8, 2009. This copy may not be in its final form and may be updated.

SEAN HANNITY, CO-HOST: The president-elect is promising new jobs, dramatic increases in domestic spending in what he is calling tax cuts.

And FOX News has learned earlier tonight that, in a closed-door meeting, aides to the president-elect got an earful from Democrats on the Hill who are concerned about the plan and how they're going to explain another huge spending program to their constituents coming so close on the heels of last fall's Wall Street bailout.

Joining us tonight, former congressman and chairman of the Club for Growth, Pat Toomey and FOX News Business Network Elizabeth MacDonald.

Video: Watch part 1 of Sean & Alan's interview | Part 2

Elizabeth, look, first of all, you talk about fear mongering.


HANNITY: I mean, I thought the country was about to collapse, it's the worst thing since the Great Depression. Obviously, he never learned about Jimmy Carter, did he?


MACDONALD: Yes. I mean when you listened to it you felt like the wheels were coming off the country. But, you know, we already have $8.4 trillion in stimulus coming through from the Federal Reserve in the TARP programs.

And, you know, you've got to ask yourselves, who says we need this? Who says we need this fiscal stimulus and that only big government spending can lead to economic growth? I mean if that were true, then Sweden would be, you know, a super power.

When you ask people their logic behind this, it's sort of like following their logic.


MACDONALD: It's sort of like following somebody down the highway with — who has their right blinker on.


MACDONALD: They never can really, adequately say why do we need this stimulus now given the spending that's already been done?

HANNITY: Hey, Pat Toomey, five weeks before the election we were all told we — we've got to act now.


HANNITY: We've got to get this passed right away here. Now he used two phrases that scared the living daylights out of — out of me as a conservative. Number one, he says only government can provide this boost.

TOOMEY: Right.

HANNITY: And then he said it a second time, only government can break the cycle. And I'm thinking, wait a minute, that's the same government that bankrupted Social Security, the same government that created the Fannie and Freddie mess that.


HANNITY: ... impacted the financial institutions and the economy as a whole.

Why should I trust another stimulus plan when the last one didn't work?

TOOMEY: Sean, you should be scared. You should be very scared. I mean, this — this is the same government that is more responsible for the mess we are in than any other entity. It's the responsibility of the federal government for this mess.

And this idea that we can spend our way out of a recession, it's — it's really, it's ridiculous. First of all, history has proven it doesn't work. Secondly, if it did work we wouldn't be in a recession now. We're spending money at a record pace.

HANNITY: All right.

TOOMEY: And lastly, you've got to remember, every dollar the government spends has to come from somewhere. It comes from the productive people in the private sector and that's money they can't spend.


TOOMEY: So this is not a good idea.

HANNITY: All right. And, Elizabeth, let me go back. We're talking about another trillion dollars here.


HANNITY: And — government being the answer. Is this — this is the single biggest transfer of — in terms of the economy moving from a free market capitalist economy to government-controlled economy that we have ever seen in our lifetime.

MACDONALD: I — yes. I agree.

HANNITY: If this passes with these numbers, can we really consider ourselves a free market capitalist economy?

MACDONALD: I would say we are in danger of losing that — our identity as a free market economy.

HANNITY: This is socialism.

MACDONALD: You know it's not gone to the point where the government is directing how, you know, companies operate. But there is — we are in danger of that. But you know, this idea of the bailout, the Obama fiscal stimulus has taken on this relentless perverted logic all its own.

And now we see, for example, you saw it today. You saw it today.


MACDONALD: Guys, and that list is that Citigroup said OK, we got this bailout money, now we will let borrowers.


MACDONALD: ... rework their loans if they are facing foreclosure. They can get a bankruptcy — judge to cram it down.

HANNITY: All right.

MACDONALD: That's where we're heading toward.

HANNITY: That's — it's frightening in every step of the way.

All right. Now, Pat, let me go back to you. When George Bush became president — and by the way I thought he did — Bush tax cuts got us out of the Clinton/Gore recession. Bush tax cuts got us out of the negative impact of 9/11. For the majority of seven years, we have record revenues, we — spent too much money where there's Congress earmarks. Low unemployment, relatively speaking.

We had good years. It's an ebb and flow to the economy.

TOOMEY: Right.

HANNITY: When George Bush became president, The Washington Post, The New York Times, The Chicago Tribune, I have a whole list of quotes here accusing Bush of talking down the economy.

Now, I listened to Barack Obama today and I said the sky is falling, we're in trouble.

Is he trying to manipulate and scare the American public into buying his socialist agenda that they otherwise wouldn't buy with fear mongering?

TOOMEY: What I think he's trying to do is to set the stage and - to set a mood that says boy, he is just inheriting the most terrible, awful, most disastrous situation imaginable to mankind and so any progress, any sign of hope becomes this great accomplishment on his part. I think that's — it's an expectations game that he is trying to manage.

ALAN COLMES, CO-HOST: Hey, Pat, Elizabeth, I don't understand how you call Obama what he wanted to do as socialism, when you just had a president nationalize the banks, nationalize the car companies.


COLMES: Give a — almost $1 trillion away and you want to call Obama.

TOOMEY: No, wait.

COLMES: ... socializing the country?

MACDONALD: Wait, hang on. I'm not.

COLMES: Come on. You've got to be kidding me on that.

MACDONALD: No, no, hang on. I'm not calling it socialism. I'm not saying that at all. I'm not saying that's what's going on. But you know, returning to what Sean has brought up about the Bush tax cuts, remember, 12 Senate Democrats voted for the Bush tax cuts in 2001.

Former Senate finance chair, Max Baucus, had said that, you know, look at entrepreneurs and small businesses, they're going to get 80 percent of the tax relief here and that could increase the demand for labor.

In other words, they knew back then it could increase jobs. So, when you talk about the Bush tax cuts, I think history has yet to show the effect of them.

COLMES: All right. Besides.

MACDONALD: ... and how good they may have been.

COLMES: Let me go to Pat here.

Bush did — also did tax credits. Now you know, conservatives are accusing Obama — they're calling it welfare when he wants to do tax credits, yet when Bush wanted to do tax credits, oh this is great. He's reducing the tax burden on Americans.

TOOMEY: OK. All right, Alan.

COLMES: I think there's a double standard here depending on which party the president empowers is.

TOOMEY: No. No. Not true. Alan, first of all, I think you make a valid point. We disagreed with the president's TARP program. We disagreed with the car company bailout. I'm just concerned that we're now going to take this to a whole new level under — President Obama when he becomes president.

On the tax side, though, you've got to acknowledge the vast majority of the Bush tax cuts were supply side tax cuts that created more incentives and helped to grow the economy. And President-elect Obama is not...

COLMES: But wait a minute. He is saying.

TOOMEY: ... proposing those kind of tax credits and tax cuts at all.

COLMES: He is now saying he's going to keep the Bush tax cuts in place. In fact, he said it all long. The only thing he ever said during the campaign was s that he would eliminate the cuts for the upper income top 1 and a half to 2 percent.

Other than that.


TOOMEY: They expire in 23 months. We need to extend them and make them permanent. And if he doesn't that's a huge tax increase.

COLMES: Well, at that point you re-examine and see where we are.

MACDONALD: But you know, William.


COLMES: Hold, hold on, one second.

MACDONALD: Yes, yes.

COLMES: At that point, Pat, you know, you will look at it — we will revisit it and see what's going to go on.

Now, Elizabeth, go ahead.

MACDONALD: Yes. Watch how the rhetoric has changed, though. He's calling - Obama is calling it a net tax cut. And what he's talking about here is, watch this, capital gains tax cuts are going to go away. A lot of middle class Americans live off I in the capital gains, off their retirement savings including elderly people on their retirement savings, too.

They are — sit squarely in the middle class. So all of a sudden you saw the rhetoric change — it was called now a net tax cut. Why? Because he knows that capital gains hike will hurt the middle class. So I — don't know. You've got to watch what's being said during this debate.

COLMES: If you look at what he said during the campaign, Elizabeth, 95 percent of — working Americans, people who actually pay into the system are going to get a break on Barack Obama.

That's what he said during the campaign.


COLMES: It's like — and we continue to look at the situation as it's ever changing.

TOOMEY: The problem is.

COLMES: I mean you know, go ahead.

TOOMEY: ... you don't have 95 percent of Americans paying income taxes.


TOOMEY: Over 30 percent are not paying any income taxes at all.

COLMES: (INAUDIBLE) local taxes, (INAUDIBLE) taxes, property taxes, paying in all types of practices.


MACDONALD: Listen, I would.


TOOMEY: Wait a minute, since when is the federal government supposed to reimbursing people's property taxes?


COLMES: One a time. You're giving a break to tax-paying Americans. You want to, you know, say well, they're not paying taxes. They are paying taxes.

TOOMEY: No, they're are not paying income taxes, Alan.

COLMES: All right. We're going to pick it right there.


COLMES: We now continue with former congressman and chairman for Club for Growth, Pat Toomey, and from the FOX Business Network, Elizabeth MacDonald.

Elizabeth, we had a recession that began in beginning of December of 2007. The longest in 25 years. The highest number of jobless are getting benefits since 1982. And 2.4 million jobs lost just in this year, the largest number since 1945.

This is what Barack Obama is inheriting.


COLMES: What does he do?

MACDONALD: It's painful. I'm not saying that he's — you know, inheriting a bowl of cherries here. It's a terrible situation. What does he do? And the question is how do you create jobs in this country?

COLMES: Right.

MACDONALD: How do you do it? And what — we saw during the campaign was a real serious debate about the small businesses. He was saying that his tax cuts won't — tax hikes rather won't hurt small businesses.

COLMES: Tell me what he should do.

MACDONALD: But you know what, the small businesses that — hired the most people will get slammed.

COLMES: But tell me what he should do.

MACDONALD: So what he should do is tax cuts.

HANNITY: Step down.

COLMES: More tax cuts?

MACDONALD: Yes. Tax cuts.

COLMES: How much you can cut?

MACDONALD: Absolutely. I — look it, I've always been an avid tax cutter. I mean I'm actually a flat tax.

COLMES: Tax cuts and that's it?

MACDONALD: No. But some target of fiscal spending. I'm not — but now what you're talking about, like Reagan said when the wheels were thought to be coming off in the early '80s. The government really is like one big elementary canal with, you know, a big appetite on one end and no responsibility on the other.

COLMES: I don't even have.

MACDONALD: So I would say do target at fiscal spending. This infrastructure spending, we don't even know what projects are in the pipeline? We're going to have palm trees lining Missouri?

COLMES: But Pat, I really have — you have wars going on.

HANNITY: You have two minutes.

COLMES: You've got all kinds of military spending and you do tax cuts on top. Isn't that — did Reagan in terms of increasing deficit and debt, you know, big military spending and, yet, and lowering taxes. That's the kind of situation we'd be in right now.

I don't know how would that bring more money in the Treasury.

TOOMEY: When Reagan — when Reagan did that, of course, the economy took off and we had 25 years of virtually uninterrupted robust economic growth and by the end of the `80s revenue to the Treasury had doubled. The problem is spending tripled. As usual, Congress has a spending problem.

COLMES: We had a circle under Bill Clinton.

TOOMEY: Yes, for a very brief time in part because we cut capital gains taxes.

I mean I — I agree completely that the policy to do, number one, what — President-elect Obama should do, make all the Bush tax cuts permanent and give the market the certainty of what the tasks code is going to look like going forward rather than this question mark about two years from now.

Second, lower capital gains. Maybe eliminate capital gains tax. Put a floor under asset values, create a rally in the stock market. That improves the balance sheets of all American savers which is more than half of all American families.

Those kinds of things combined with the huge stimulus we've already gotten from the Fed, I think that would — that will turn things around.

COLMES: You're accusing Barack Obama, Elizabeth, of, you know — being too much, being proactive, spending all his money. The Bush administration didn't see anything. Didn't see it coming.


COLMES: They saw — they are acted like everything was OK.

MACDONALD: Look it, I didn't use the word — I'm not accusing him. I'm just saying hold on a second. Wait a second. Be more circumspect. Do we need a trillion? Watch how the numbers have — quickly grown within weeks. Now we're talking over a trillion.

COLMES: Keeps getting worse, huh?

HANNITY: Hang on a second.

MACDONALD: That's right. I mean, so you know, do — I'm just saying wait a second, hang on.

HANNITY: And by the way, just to remind our liberal friends. We're actually winning this war. We have a timetable now.

COLMES: Thanks to Obama.

HANNITY: ... despite the Democrats undermining the president and our military and the war is now on the inside because we stayed with it.

Pat Toomey, let me ask you this. Let's say Sean Hannity is running for president and I know — I know you'd vote for me.


TOOMEY: Absolutely.

HANNITY: Let's say I'm running for president.

TOOMEY: Right.

HANNITY: Let's say I say — have as my platform 95 percent of you are not — are going to get a tax cut, not going to have to pay one penny in income tax and, on top of that I'm going to give you a check.

Have we gotten to the point in America where there are a larger percentage of people that believe in that philosophy rather than capitalism, individual responsibility?

TOOMEY: Yes. I don't think we're there yet, Sean. But there.

HANNITY: Are we close?

TOOMEY: There's a — well, we're moving in that direction. When you systematically take more and more people off the tax rolls and say for these people, despite having incomes, government should be free for them and by the way we'll expand the services and give more money and more programs, you create an incentive, obviously, create a political dynamic.

HANNITY: You create a voting.

TOOMEY: The demand is more government.

HANNITY: Can I say it differently? You create a voting base?

TOOMEY: Well, yes. That's — and look, let's face it, it's in the Democratic Party's interest to have greater dependency on government.

HANNITY: Yes. All right. Let me go to.

TOOMEY: And Republicans believe in more freedom and individual personal responsibility.

HANNITY: Yes. I know Elizabeth will vote for me for president.

Here's a question I have. You know what? Social Security is bankrupt because of —government. We're in this financial mess because, you know, we were told, government forced banks to make risky loans and impacted the banks financial institutions now the economy as a whole.

They caused all of this.

Why do so many people put their faith, hope, and trust in an institution or a bureaucracy, government, that has failed us so often and so regularly?

MACDONALD: But, you know, it's almost, you know, hoping after — hoping — it's a blind faith. And, you know, what we're talking about, Sean, is that $8.4 trillion that has already been approved and going into the system separate from the fiscal stimulus, watch these numbers.

It's more than Louisiana purchase. More than the S and L crisis. What was spent there.

HANNITY: More than every war.

MACDONALD: More than what we spent on every war.

HANNITY: Every war ever fought.

MACDONALD: It's actually on an inflation — it's just the basis. It's twice those sums. So it's already in the system. Why do we need more, that's the question.

HANNITY: All right. Last question, Pat Toomey, the bottom 50 percent of wage earners pay 2.9 percent of the bill, top 20 percent pay 85 percent.

TOOMEY: Right.

HANNITY: Is that redistribution of wealth? Is that socialization before we even get started with this?

TOOMEY: Boy, it absolutely is a redistribution of wealth. I mean, that's — a very big part of what the government is doing these days. And that doesn't create prosperity. That doesn't create new jobs. That doesn't create growth. And that's part of our problem.

HANNITY: All right. Well, capitalism as we know is in jeopardy, guys.

Thanks for being with us. Appreciate it.

TOOMEY: Thank you.

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