This is a rush transcript from "The Journal Editorial Report," July 24, 2010. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: This week on the "Journal Editorial Report," Tea Party politics. The caucus is created in the House, but can the movement get its candidates elected? And will they change the GOP or will the GOP change them?

Plus, lost in taxation. The IRS gears up to enforce its vast new powers under Obamacare, as rank-and-file Democrats revolt over coming tax increases. Can party leaders keep a lid on the dissent?

The Journolist controversy. Do leaked e-mails prove the existence of a vast left wing media conspiracy? And is there anything like it on the right?

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

Minnesota Congresswoman Michele Bachmann officially formed a Tea Party Caucus in the House of Representatives this week, giving the movement a formal presence on Capitol Hill. But the move is getting a cautious reception from rank-and-file activists who are warning lawmakers not to try to take over their movement.

Republican candidates like Sharon Angle in Nevada and Rand Paul in Kentucky have benefited from grass-roots Tea Party support, but whether they can win in November is still an open question. And if they do make it to Washington, it's unclear whether they will change the GOP or whether the GOP will change them.

Joining the panel this week, Wall Street Journal editorial board member, Jason Riley; opinionjournal.com columnist, John Fund; and senior economics writer, Steve Moore.

So, John, let me go to you first. You've written favorably about the impact of the Tea Party this election season. Just how significant has that impact been?

JOHN FUND, OPINIONJOURNAL.COM COLUMNIST: It's been a tremendous shot in the arm for anti-establishment Republican candidates. They won a series of primaries no one expected them to do. Now that may make it a little difficult for them to win over moderate independent voters in the fall but, right now, enthusiasm matters to politics. And all of the enthusiasm is with the Tea Party.

I'm here in Las Vegas attending both a left-wing bloggers convention and a Tea Party convention. And I can tell you, there's a world of difference in attitude and enthusiasm between the groups.

John, you're going to both of those conventions? You're ambidextrous, ideologically.

FUND: I'm a reporter. I —


FUND: — both sides.

GIGOT: I appreciate that, John. I'm glad to see it.

All right, Steve, what do you think about John's take on this? Has it been that significant? The real acid test comes, doesn't it, when we seen what the election results are in November?

STEVE MOORE, SENIOR ECONOMICS WRITER: First of all, I think what surprised me about the Tea Party Movement — and I've covered it in a lot of states as well as John has. What's surprised me, Paul, is a couple of things. First, it's proven to be so resilient. When it started about a year, to a year and a half ago, people thought that was just a one-flash wonder. But it's continued to, I think, grow in influence and numbers.

Second of all, I think the thing that's been amazing about this is how diverse it is. And this is something I think the left has really understood. It's not just, you know, white, you know, white voters. It's old people, young people, housewives, you know, people from all walks of life and, by the way, many minorities included. Now I've —

GIGOT: And, Steve, the animating ideology here, or principle, is really economic, is it not, and the idea of too big government.

MOORE: Definitely.

GIGOT: This is not a cultural conservative movement?

MOORE: No, I totally agree with that, Paul. I think that these are people who want fiscal conservatism. And it's a very anti-Washington monument — I mean, Washington movement. And one of the Tea Party leaders the other day described Washington as the sanity-free zone. And that's sort of the attitude of a lot of people of this movement.

But you asked the key question, Paul: Can the people that they've elected through these primaries — and they have been very successful Republican primaries —

GIGOT: Right. Right.

MOORE: Can they get them through in November?

GIGOT: Well, and also is this, Jason, just a short-term reaction to the excesses, perceived excesses of the Obama administration, and to the rotten economy, or does it have real grass-roots staying power?

JASON RILEY, EDITORIAL BOARD MEMBER: Well, that's the big question. There's no doubt that the GOP has lost its way in recent years, particularly on issues like spending.

GIGOT: Right.

RILEY: And the Tea Party Movement has helped the GOP find its way. So in the short run, it's doing some very positive things for the party. And you already mentioned Sharon Angle and Rand Paul. There's also Nikki Haley in South Carolina, Marco Rubio —

GIGOT: Gubernatorial candidate, and Marco Rubio.

RILEY: Gubernatorial candidate, Marco Rubio, another Senate candidate down in Florida. So good people are benefiting from the movement. But I think at its core, what it is, is a reactionary populous movement. And you have to wonder whether the steam will run out after the Obama era runs out. I mean, we've already seen —

GIGOT: What's your thought on that? Will it or not?

RILEY: You've already seen the caucus forming in the House, the Republican caucus forming in the House. So there's already —


RILEY: — co-opted the Tea Party. They're a part of the GOP establishment.

GIGOT: But that's the history of third party movements, is that they tend to be — they don't tend to form their own independent party. Once in a very great while. They tend to be co-opted.

RILEY: Right.

GIGOT: That can be a good thing. It means the majority — one of the two main parties is taking on their ideas.

RILEY: Sure. But I think there's so much overlap between what the Tea Party stands for and what the GOP stands for when it's standing for the right things. That once the GOP is back on course and has the footing against, what role will the Tea Party be able to play there.

GIGOT: John Fund, you're in Las Vegas. Does Sharon Angle have a chance to win that, still? Because Harry Reid hit her with a barrage of ads and she lost what would be a lead coming out of the primary. And my view would be, if some of these Tea Party candidates do lose in November, their influence is going to be reduced come the next Congress. The Republicans will say you cost us seats.

FUND: Absolutely. Look, Sharon Angle has lost ground. Harry Reid has another $20 million to spend. But there's one overriding number here, Paul, 15 percent, that's the unemployment rate in Las Vegas. You see foreclosed houses and restaurants everywhere. And I think the anger here will still make it very difficult for Harry Reid to get above 44 or 45 percent in the final analysis.

GIGOT: Steve, Trent Lott, former Republican Senate leader, this week said that we don't need any more Jim DeMint clones in the Senate. Jim DeMint being the South Carolina Republican who is allied with a lot of the Tea Party candidates. "We have to co-op them when they come to Washington." Is that the mind set of most Republican members on the Hill?

MOORE: It certainly isn't the mindset of the Tea Party. Just the opposite. They're tired of politics as usual. And one of the things that strikes me, Paul, when I've talked to various Tea Party people, they are still angry at the Republicans for the excessive spending and a lot of the corruption that happened when Republicans held Congress. So no, they want to co-opt the Republicans, rather than the Republicans co-opt them.

GIGOT: So we're going to have a tug-of-war here about who is co- opting who.

MOORE: No question.

GIGOT: But that is the history, Steve, of these third party movements. And I would consider it a triumph of Tea Party agenda, if they can get the Republican Party in Washington to advance a lot of those ideas.

MOORE: No question about it. And one of the last important things I wanted to say about this is this kind of visceral reaction on left to the Tea Party Movement, this hostility to the Tea Party Movement. I think is almost jealousy. I think the left doesn't understand why you have this big populous revolt on the right that — you know, the left is used to having the kind of, you know, populist grass-roots people, the activists on their side. And this is something that's very discombobulating to the Democrats right now.

GIGOT: All right, Steve.

When we come back, lost in taxation. Meet the new, but not improved Internal Revenue Service, created by Obamacare.

And more Democrats come out in favor of extending the Bush tax cuts, even for the wealthy. Is there a revolt underway?


GIGOT: Is there a revolt brewing in Democratic ranks over taxes. This week, two more Senators joined Evan Bayh of Indiana and at least a half a dozen House Democrats in calling for an extension of the Bush tax cuts for all earners, even those making more than $250,000 a year. Senators Kent Conrad of North Dakota and Ben Nelson of Nebraska are the latest to support extending the cuts, which are set to expire December 31st.

President Obama and Democratic leaders have said they'll extend the break for taxpayers making $250,000 or less.

And late this week, House Speaker Nancy Pelosi rejected the idea of including high-income earners.


REP. NANCY PELOSI, D-CALIF., SPEAKER OF THE HOUSE: Our position has been that we support middle-income tax cuts. The tax cuts at the high end have increased the deficit enormously and that they — and they are — have not created jobs.


GIGOT: We're back with Steve Moore. And also joining the panel, senior editorial page writer, Joe Rago.

Joe, before we get to the Democratic revolt on taxes, let's deal with this issue of IRS and Obamacare. Is it going to see a big increase in its authority?

JOE RAGO, SENIOR EDITORIAL PAGE WRITER: Well, that's what Nina Olson, the National Taxpayer Advocate thinks.

GIGOT: And she's part of the IRS.

RAGO: She's an independent outfit within the IRS. She came out with a report last week that said, you know, this is the greatest social benefit program the IRS has ever been asked to —

GIGOT: Really, ever?

RAGO: Ever been asked to enforce. She says they're going to need a lot more money, a lot more auditing power, a lot more agents.

GIGOT: And what will they being doing? Will they go around and say, you, Rago, you didn't buy that health insurance policy, so we're going to decide — try to monitor that and then decide whether or not to fine you. Is that the idea?

RAGO: Right. They've got to fine you if you don't have health insurance as required by law. They have to administer these very complex subsidies. And then one other thing that Democrats included in the bill last March was these new business reporting requirements of certain types of income. Right now, you only have to have a 1099 for —

GIGOT: That's one of the forms in the flurry that come in the winter. You get them if you have certain income from outside your employer or other requirements.

RAGO: Right. And right now, it's only if you buy a service as a business. Now —

GIGOT: So if you're a small business and purchase a service, you have to declare it on a 1099.

RAGO: Right. And now, you have to declare goods, as well. So —

GIGOT: On anything above $600.

RAGO: Right. So if you buy a bunch of computer paper or office supplies or —

GIGOT: Office supplies?

RAGO: Whatever it might be. As long as it comes from one person, you're going to have to report that. And Democrats said they wanted to close something called the tax gap, which is this —

GIGOT: Oh, the people aren't reporting all of their income.

RAGO: That's right. It's over this mythical pot of money that's lying behind the rainbow that they're going to get. But it's created this huge, new burden for businesses. And a lot of Democrats are even worried about it.

GIGOT: Evan Bayh and others have said, look, this is a bad idea. We ought to repeal this.

RAGO: Exactly.

GIGOT: Steve, that brings up this idea of a broader Democratic tax revolt. We're seeing it — it's not at the leadership level. It's certainly not at the White House or the Treasury, but we're seeing it at some of the rank-and-file level. Some Democrats in the House and Senate, saying, you know what, those tax increases that are set to go in on anybody making over $250,000, on capital gains, that means on dividends, that means on income, we don't want to — that's going to hurt the economy if it hits. Let's not do that. How serious is this revolt?

MOORE: The revolt is really brewing. And what started as a mini revolt is becoming — is expanding. Joe Lieberman, just yesterday, said — added to the calls for delaying the increases in these taxes.

And, Paul, I think there's two things going on here. One is some of these Democrats genuinely believe that it's a bad idea economically to raise taxes during a recession.

GIGOT: Right.

MOORE: And who could argue against that. But some —

GIGOT: Nancy Pelosi could argue against that, Steve.

MOORE: That's true.

But most sane people, I think, agree that that it's not a good idea to raise taxes during a recession.

And here's the other thing though. I think a lot of the Democrats, especially the ones in the House who are grumbling about this, realize it's a big hot button political issue. Remember, Paul, there are 50 or 60 House Democrats that may not be returning in the fall because of the election. And they realize, with the American people, this is a real loser of an issue.

But my favorite part of the story, if I pay, is what Jerry Nadler wants to do in the —

GIGOT: A New York Congressman.

MOORE: Yes, in New York. He has a bill that basically would provide a cost-of-living adjustment for people living in high-cost states, like New York, like Massachusetts, like California. So what the — the long and short of this is the people who live in San Francisco and Manhattan and Boston would actually pay lower income taxes than people in the rest of the country. And they even call it tax equity.

GIGOT: So this is the bailout for high-state taxes.

MOORE: That's right.

GIGOT: They want New York to get a benefit over Nebraska. That's not going anywhere, Steve.

MOORE: Probably not. But it does shows that even liberals don't like to pay these high taxes.

GIGOT: Joe, how much of this is political cover versus actually a serious revolt?

RAGO: It's hard to tell with the modern Democratic Party.

GIGOT: The modern political class. Yes.

RAGO: This is — the Bush tax cuts expire, it's going to be one of the largest tax increases in the history, and certainly in several decades. And you know, that even under Keynesian theory, this —

GIGOT: Tax increases aren't a good idea.

RAGO: It's driving Democratic, economic policy. This is an issue.

GIGOT: Steve, any chance the Treasury will say, look, we don't want to go ahead with this, and let's extend it — extend the cuts.

MOORE: I do think — I may disagree a little bit on this. I think there's a chance that even the White House and the speaker of the House may say, look, let's not — at least for one year, let's extend all the tax cuts and not have a big tax bomb on January 1st, 2011.

GIGOT: I think you're wrong, Steve.

MOORE: I know you do.

GIGOT: I hope you're right, but I think you're wrong, because they want the money.

All right, still ahead, you've heard of the vast right-wing conspiracy. But was there a vast left wing conspiracy at work in the 2008 presidential election? When we come back, a closer look at how members of an e-mail group for liberal journalists attempted to influence coverage for then-candidate Barack Obama, and take down the opposing ticket.


GIGOT: Some are calling it the vast left-wing media conspiracy. From 2007 until last month, some 400 liberal journalists and policy wonks exchanged ideas and commentary in an off-the-record Internet group called Journolist. It was shut down after some of those e-mails leaked, leading to the resignation in late June of Washington Post blogger, David Weigel, who was hired by the paper to cover conservatives, only to be caught disparaging them on the list-service in highly personal terms. But someone who belonged to Journolist continues to leak e-mails from its archives, providing a glimpse into how some liberals in the media attempt to coordinate their story lines to protect candidates and ideas they support, and take down those that they don't.

We're back with John Fund. And also joining the panel, opinionjournal.com editor, James Taranto.

So, John, let me go to you first. Some viewers might think, what's the big deal, liberal journalists supporting liberal politicians and causes. Why care about this story?

FUND: Well, journalists are allowed to have opinion and most of the people on Journolist were opinion writers. But they're supposed to be independent. And what happened at Journolist is you had an attempt to have story lines, suppress coverage and promote other coverage. As Andrew Sullivan, who is a very pro-Obama journalist, says, it was corruption. You had things like, the day Sarah Palin was selected as John McCain's running mate, the headline on one Journolist entry was the line against Palin, and everyone would pile on on how to take her down. At the same time, Reverend Wright controversy threatened President Obama's candidacy. And all of the discussion on Journolist was about how do we protect Obama and how do we minimize the coverage of Reverend Wright's anti-American, anti-white out- burst.

GIGOT: So, John, is this about — is this about pack journalism or is this about dictating a political point of view. Because if it's just dictating — if it's just people exchanging ideas and someone to influence their own writing, I think that's like conversation. What does this cross a line?

FUND: Sure. I think it crosses the line when you have people trying to coordinate the story lines, make them all line up in a row, and try to coordinate responses to try to shut down coverage of — in other words, not to practice the First Amendment, but to try to minimize use of the First Amendment.

GIGOT: And they did do that in the case — some of them did do that in the case of the coverage by ABC News during the campaign about Jeremiah Wright?

JAMES TARANTO, OPINIONJOURNAL.COM EDITOR: Yes. And that is the most scandalous finding of this Journolist. These guys were trying to suppress the news. And one of them, a guy named Spencer Ackerman, was actually advocating smearing people, including fellow journalists, like Fred Barnes, as racist in order to shut them up about this.

GIGOT: Let me quote that. I just want to read that. This is from Spencer Ackerman, who was then with The Washington Independent. "If the right forces us all to either defend Wright or tear him down, no matter what we choose, we lose the game they've put upon us. Instead take one of them, Fred Barnes, Karl Rove, who cares — and call them racists. Ask: Why do they have a deep-seated problem with a black politician who unites the country."

TARANTO: If calling someone a racist has any factual meaning at all, what Ackerman is describing is a reckless disregard for the truth, the legal test for libel. He's now employed by Wired magazine.

GIGOT: What's the defense of Ezra Klein, The Washington Post blogger, who created this list? What's their defense for all of this, John?

FUND: Their defense is this was just a giant chat room and there really was no coordination. And people are blowing things out of context and how of proportion.

Well, I think the response from The Daily Caller, which broke the story, is, if you think you were taken out of context, release the e-mails that you sent and point out exactly what the full context was. So far, he hasn't had any takers.

GIGOT: Well, here, John, is one of my problems with what The Daily Caller is doing. It's a great scoop for them. But the problem is, I wish they would release all of the e-mails. We're relying on their interpretation of the context. Why don't they release the archives that they have?

FUND: I think they're debating that and I think they may well do that in the next few days.

GIGOT: Is there something like this on the right, James? Do you participate in any kind of a list-serve like that?

TARANTO: I don't. I don't know. I can't stay that there's nothing like this. It may be. I mean, most of these guys, with a few exceptions, like Joe Klein of Time magazine, and Jeff Toobin of The New Yorker, but most of the rest of them are pretty junior-league guys, right? So maybe we're just at too high a level to be involved in something like this. But I don't think so.

GIGOT: Yes, I don't know of anything like this either. I've always viewed myself, James, and I think all of us do at the "Journal," in competition with other media organizations, even conservatives. We want to get the story and beat them. We don't want to tell them what we're doing and feed some kind of common line.

TARANTO: That's right. That's why we put out a unique journalistic product. And what these guys end up putting out is homogenized drivel. We make ourselves look smarter than we really are. They make themselves look dumber than they really are.

GIGOT: John, quickly, have you ever been part of a list like this?

FUND: No, I serve on some list-server about election law and other things. We exchange information. I don't believe that competitive journalist would actually get involved in something like this. That's why these people look like they're something other than journalists at first appearance.

GIGOT: OK, John, thanks.

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.

Jason, first to you.

RILEY: Paul, there's a new report out on teen employment, showing it's way down as a direct result of increases in the federal minimum wage in recent years. Forty-one percent it's gone up since 2007. Overall, teen unemployment is now 25 percent in the country. Among black teens, it's 40 percent. Now, the NAACP has been out there recently, of late, demanding apologies from this group and that group for some perceived racial slight. I think they'd do better to focus on pressuring Congress and the White House to either reduce or even eliminate the federal minimum wage. I think black folks would prefer a job to an apology.

GIGOT: All right.


TARANTO: I have a miss for the NAACP and for conservative blogger, Andrew Breitbart. Breitbart, this week, reported erroneously that Shirley Sherrod, a USDA official, had discriminated by race. The NAACP quickly attacked her for racism. It turned out the report was inaccurate. The NAACP apologized. Breitbart issued a correction. The NAACP has also accused the Tea Party of racism based on a false second-hand claim of racism. They owe it an apology as well.

GIGOT: All right, James.


RAGO: A miss this week to New York Congressman Charlie Rangel, former Ways and Means chairman, for his ongoing ethical issues, alleged tax evasion, Caribbean bungalow and so forth. But a hit to the House Ethics Panel, who took the highly unusual step of bringing this to trial. And we'll see how it plays out.

GIGOT: It plays out starting next week.

That's it for this week's edition of the "Journal Editorial Report."

Thanks to my panel and to all of you for watching.

I'm Paul Gigot. We hope to see you all right here next week.

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