This is a rush transcript from "The Journal Editorial Report," August 2, 2008.

PAUL GIGOT, HOST: This week on the "Journal Editorial Report," Obamanomics, 101. How much would the Democratic presidential candidate raise taxes? And what would it do to our weak economy?

Plus, John McCain makes a tax mistake of his own. Would he really raise your payroll taxes?

And another blow to the GOP as a senate legend is indicted in an ethics scandal. Could Democrats really pick up nine or 10 senate seats in November?

The "Journal Editorial Report" begins right now.

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

Fresh from his overseas tour, Democratic presidential candidate Barack Obama turned his attention to the U.S. economy this week, convening a panel that included billionaire businessman Warren Buffett, former Treasury Secretary Robert Rubin, and former Fed Chairman Paul Volcker. He also toured some battle ground states calling Republican economic policies reckless, and promoting relief for the middle class. But just what is he proposing? And what affect would his policies have on an already-weak economy?

Here with a closer look at Obama's plan, Wall Street Journal columnist and deputy editor, Dan Henninger; columnist, Mary Anastasia O'Grady; opinionjournal.com columnist, John Fund, and economics writer, Steve Moore.

Mary, let's start talking about what exactly Obama is proposing?

MARY ANASTASIA O'GRADY, COLUMNIST: Obamanomics, if you can say that.

GIGOT: I can barely say it.

O'GRADY: Starts with an increase of the top marginal tax rate for income, goes from 35 percent up to 39.6 percent. If you add in a change in deductions, that takes you to 1.2 percent more and you are over 40 percent on the top marginal rate.

GIGOT: All right, and then you throw in raising the capital gains tax rate which is now 15 percent.

O'GRADY: Yes. He wants to take to it 28 percent.

GIGOT : 25 or 28 percent.

O'GRADY: Right.

GIGOT: Then an increase also in the tax rated on dividends which is now 15 and could go also as high as maybe 28 percent.

O'GRADY: Right. All in, that would take to you about 62 -- almost 63 percent, the top marginal rate.

GIGOT: That's also if you include though Social Security, the payroll tax increase in addition because he's talking about something unusual.

Right, Dan?


GIGOT: He's talking about raising something we haven't heard before, lifting the tax, the cap on the income amount that you pay the payroll tax on above $250,000. Right now it is frozen at 102 percent and that could mean tax increases of how much?

HENNINGER: Well, it could be between 12 percent, if you raise the payroll tax like that, right?

GIGOT: 6.2 percent on employees.


GIGOT: And 6.2...

HENNINGER: And employer, 6.2 percent.

GIGOT: And the campaign says that is not true, we didn't say that. They won't tell you how much it is.

HENNINGER: And this is why -- you know why they won't tell you? This is an artifact of the crazed political campaign we have now. When were the proposals first broached? Last year, right?

GIGOT: Sure.

HENNINGER: He brought these up when the economy was actually more or less healthy. A year later, and going into the first quarter of 2009, we are talking about raising taxes on the backs of a staggering economy. There is no economist in this country anywhere who will tell you that is a good idea but that is what they have on the table.

O'GRADY: They still haven't fixed the alternative minimum tax also, which is cutting into the tax returns of middle class -- middle income earners. And if they try to fix that, without just getting rid of it, the patch could actually increase by another 5 percent and take the top marginal rate.

GIGOT: But in order to be able to pay for reducing the alternative minimum tax.

JOHN FUND, OPINIONJOURNAL.COM COLUMNIST: The operative word is "could." And Dan is right. They are being purposely vague because they realize the economy is in trouble.

I think the modern artifact of campaigns now is you keep everything vague. You never specify anything. But we know one thing. Almost always, when Democrats have both branches of government, congressional and executive, they raise taxes more than they promise in the campaign. And if you say you wanted to target the rich, be careful if you are not a middle class person standing near the target. It'll get you too.

GIGOT: OK, John, that's an interesting point.

And Steve, I want you to address that point because Obama would say, look, I'm not going to raise taxes on anybody below $250,000. In fact, I'm going to cut them for middle class taxpayers. How credible do you think that is and how would he do that?

STEVE MOORE, ECONOMIC WRITER: Well, Paul, I'm still waiting for Bill Clinton's middle class tax cut, so I don't think it is very credible. And one of the things that came out of this week's Obama economic summit was just a deluge, a blizzard of new spending programs. It was as if tigers were let out of a cage and it there was talk about increased spending on infrastructure and public works and increased money to states, increased money on health and at the same time he's promoting a big anti-growth tax agenda.

And you know, what is different about Obama than Bill Clinton when he ran in 1992 is Bill Clinton ran as a kind of fiscal conservative, on the message of fiscal responsibility. I don't hear that message from Obama. It is spend and tax.

GIGOT: Can he pull this off, Mary? Do you think he can really -- I mean, in other words, with the economy struggling -- and we all see that it is. I mean, you know, the jobs report, and more jobs lost, 50,000 this week, and unemployment rate up to 5.7 percent, no sign this is going to recover very fast. Can he really raise taxes in the teeth of this weak economy?

O'GRADY: Well, I think the market is telling him he can't. If you look at the GDP numbers that came in last week, they said -- it came in at 1.9 percent for the second quarter. That was weaker than expected. And the reason it was weaker than expected is that begins drew down inventories. Now that bodes well for the third quarter because they will need to rebuild those inventories. However, it also is a signal to the government that businesses are not confident. and I think actually a lot of businesses here are building in, anticipating an Obama win and this tax cut and that's why you are seeing...

GIGOT: Tax increase.

O'GRADY: Sorry, increase. And that's why you are seeing these anemic numbers.

GIGOT: Walter Mondale ran in 1984 on a platform of raising taxes. He lost 49 states. Tax increases still, I don't think, are positive. Has the tax cut message so lost its bite that Obama can actually win an election, promising to raise taxes?

FUND: President Bush's approval rating is 28 percent. That explains an awful lot of why people are going to listen to what Barack Obama is selling and is saying it's at least different from what we have. But as we get close to November election, Paul, as people focus on the choice, they want change, but there is good and bad change. And in a weak economy I think the argument that taxes could drive an economy even lower, may have some resonance.

HENNINGER: And the McCain people came in to see us several weeks ago and their reading -- their polling tells them that what people are upset about in Washington is this spending. And if you have Democrats going in there saying we will spend a lot more money and raise your taxes, that may not sell too well.

GIGOT: All right, when we come back, John McCain has a better tax plan? Well, some days he does, some days he doesn't. Is an increase in payroll taxes, is it really on the table in a McCain administration? Find out after the break.


GIGOT: Republican presidential candidate John McCain has some tax plan problems of his own this week. Asked by ABC's George Stephanopoulos if he'd consider raising payroll taxes to shore up Social security, here's what he had to say.


SEN. JOHN MCCAIN, PRESIDENTIAL CANDIDATE: There is nothing that's off the table. I have my positions, and all articulate them. But nothing's off the table.


GIGOT: Well, Dan, if nothing is off the table, sounds like taxes may be on the table?

HENNINGER: On the other hand, he then talked about it Monday, he talked about it Tuesday and he talked about it Wednesday, trying to explain what exactly he meant when he made that statement.

GIGOT: All right, are they on or off?

HENNINGER: Well, I would say they are on the table.

GIGOT: Now the question, why is John McCain getting bogged down in a morass like this when, in fact, his team has prepared a perfectly good tax program for him, which includes, for instance, the alternative tax system where you get to choose to stay in the current system or a system that has two rates, 15 and 25 percent. Why isn't he on television talking about that instead of negotiating with the Democrats about Social Security?

GIGOT: Steve, can you please plumb the mind of John McCain for us? What is he thinking?

MOORE: Well, it is frustrating. Dan is exactly right. I think that he got his tax plan from the Wall Street Journal editorial page and there is a lot of good stuff in there that he just doesn't talk about. He's not comfortable in that skin. He doesn't know whether he wants to be Ronald Reagan tax cutter or Dwight Eisenhower balanced budget guy.

And if John McCain is going to win this race against Barack Obama, who is a much more articulate, attractive candidate, he has to win on two issues. He has got to convince America there is big distance between him and Obama on national security issues and taxes. And when he makes gaffes like he did last week, it only confuses people and makes people think maybe he's more like the old John McCain, not the new John McCain.

GIGOT: But, John, John McCain would say, on the substance of this, well, everything has to be on the table on Social Security. It's a big problem to solve. But if I'm going to ask the Democrats -- we're probably going to have a Democratic Congress. If I am going to ask Nancy Pelosi to raise the retirement age or somehow reduce the increase in benefits going forward, don't I have to put taxes on the table?

FUND: Well, articulating it the way that he did scares his base, will drive them to stay home at the polls, and I think it gives away too much because you are negotiating with yourself. Obviously, you can say I can sit down with the Democrats in good faith and we can talk about everything. But prejudging that you are going to surrender on the tax issue is exactly the kind of mistake the first President Bush did in 1990. He got an enormous tax increase and did not get the spending cuts he was promised and lost the next election. I don't think that is a pattern John McCain wants to follow. And that is what Bush did. The first president Bush put everything on the table.

GIGOT: Yes, but I think he may say, Mary, I don't want to get trapped like George H.W. Bush, who said read my lips, no new taxes, and had to renege and got trapped. And he's saying I will not go there. Of course, he has to win first.

O'GRADY: The trouble for John McCain right now is that I think he doesn't really -- is not really a convert. I mean he really hasn't had inversion.

GIGOT: To tax cuts, yes.

O'GRADY: No. And when he first won the primary, when he first became the nominee, he knew he had to convince a lot of supply-side tax cutting Republicans to come out and vote for him. That is why he went around with Phil Gramm. And John McCain no longer has Phil Gramm. And I think this is one thing that will concern a lot of people because Phil Gramm is no longer there to shore him up on that issue.

GIGOT: Because he resigned because of the flap over whether or not Americans were whiners, and so on and so forth.

O'GRADY: We're all wimps, yes.

GIGOT: John McCain said something else interesting this week. He praised -- went out of his way to praise Nancy Pelosi, the Speaker of the House, and said this is somebody I could work with. Now is that the kind of argument that will help in the election?

HENNINGER: No, I don't think so. I mean, look, what he's trying -- he also praised Al Gore's ten years of energy freedom through renewables only.

GIGOT: Right, saying we could have all energy through renewables, in ten years, which I don't think anybody...

HENNINGER: No. McCain said, if the vice president says it is doable, I believe it is. The next day he then revised that.


HENNINGER: Look, we understand he has to make an appeal towards the center, but he's making an appeal to the left and it is sounding incoherent. There is an argument that John McCain -- people are upset, and a little concerned about Barack Obama. They're not sure they want to vote for him. And if they don't, McCain is an easy default candidate. But if he keeps on this track, he'll make Obama the default candidate.

GIGOT: What does it tell us, John, about McCain as a candidate, his nature, and as a potential president?

FUND: Impulsive, someone who believes in a few core issues -- duty, honor, country, national security -- but is uninterested in a whole range of other issues, and susceptible to any advisor who gets in the door last and gets his ear. I think John McCain has conservative instincts. I don't think he has a well thought-out conservative philosophy to back up those instincts.

GIGOT: All right, John, thank you.

Still ahead, the Senate's longest-serving Republican is indicted on corruption charges, raising Democratic hopes on Election Day. We'll look at which seats are most vulnerable when we come back.


GIGOT: Is the Senate's longest-serving Republican was indicted this week on federal corruption charges, making the GOP's all ready grim prospect for the November election that much darker. Alaska Senator Ted Stevens pleaded not guilty Thursday to charges that he lied about accepting more than a quarter of a million dollars worth of gifts from an Alaskan oil firm.

Obviously, John, the senator deserves the presumption of innocence and how strong this is case against him.

FUND: The good news for Ted Stevens is the judge has granted him an early trial. It will start in late September. It will probably be over by the November election. The problem is, I think, the federal case, although it is limited to lying on financial disclosure forms, is very strong. They have telephone calls between Ted Stevens and the head of the oil company. They have e-mails Ted Stevens exchanged with the fellows who gave him the gifts. And I think those will be devastating, especially since the judge seems disinclined to send the case to Alaska where there might see a friendly Ted Stevens jury. The case will be tried in Washington apparently.

GIGOT: Steve, Ted Stevens was known as the king of appropriations, the spending subcommittees and he brought all kinds of pork back to Alaska, including the infamous bridge to nowhere. Do you see that it flows out, this indictment, somehow, and behavior, flows out of that culture?

MOORE: No doubt about it. But maybe, Paul, if anything good can out of it, maybe the bridge to nowhere will never get built now because that was Ted Steven's project. And this is the man who really has been the king of pork.

And really what this demonstrates, this indictment, is how corrupting pork-barrel spending is because it creates this kind of pork for political- favors mentality on Capitol Hill. And we made the point over and over. Until Republicans can cure their addiction to pork spending, Democrats are going to win, because Democrats have always been the party of special favors.

GIGOT: All right, Dan, he does have the early trial date, as John said, in September. But before that he has a primary in August with several competitors. Can he win that primary?

HENNINGER: I think it is unlikely. I don't know. I wouldn't entirely rule it out. It is a special case. I mean, Steven -- Ted Stevens was involved with the fight for Alaskan statehood and contributed to that. And he has brought money into every nook and cranny of Alaska.

GIGOT: That's right.

HENNINGER: Now, to Steve's point, the feeling in Alaska is -- is that as Ted Stevens became more of a grandee, he lost contact with the people of Alaska. He got interested in making money in the way he has done here. So I think he probably will lose that primary, but, oh, boy, I think this is really going to be tough on Republican prospects. He's a poster boy for what Republicans hate.

GIGOT: If he loses, John, the primary and somebody else runs, the Republican chances of holding that Alaskan seat are improved, are they not?

FUND: Yes, there is a strong Democratic candidate, the mayor of Anchorage, but it's such an overwhelmingly Republican state, I think they'll have a good chance of holding the seat, absent Stevens.

GIGOT: Steve, how much does this image here, with this indictment, hurt Republicans overall and specifically Republican prospects of holding onto the senate?

MOORE: Every time, Paul, it seems like Republicans have turned the corner politically, something like this happens, where people are reminded of the overspending and the corruption, which is what got Republicans thrown out of office in 2006. I think this is a real below.

GIGOT: Steve, how would Republicans turn the corner? That's what I wanted to know, and what corner they turned?


MOORE: What corner? You've got me there. They were starving to say we will not have pork spending anymore. We've learned the lesson. But they haven't and are still doing the pork spending. And it's the reason the Republicans are not going to win back the House or the Senate in 2008. And the real danger, as John Fund knows this, there is a chance Democrats might get the 60 votes in the Senate.

GIGOT: Wow, that would mean they'd have to lose nine Republicans, 49 seats now.

MOORE: They could do it.

GIGOT: They'd have to lose nine. And now, Virginia, that race will probably already be Democratic.

FUND: Yes, New Mexico as well.

GIGOT: New Mexico as well. Where are the other two or three or four real battleground states?

FUND: Well, there is Minnesota, there is also...

GIGOT: Incumbent Norm Coleman running against Al Franken, the comedian.

FUND: Colorado, which is an open senate seat. Udall is running for that seat and well as one in New Mexico. There's Mississippi. There's various other states.

But I don't think they will lose nine seats. But the Ted Stevens thing throws into sharp relief just how damaged the Republican name-brand has been. And I think if Republicans stay home, they could easily lose six or seven seats and that would, with some moderate Republicans voting with the Democrats on some issues, that could mean they might not even be able to hold a filibuster even if there are over 40.

GIGOT: And the Republican minority leader, John Boehner, was in to see us this week. And he said if they had indictments like this, that might make it easier for him -- indictments of Republicans -- make it easier for him to make the case to his own caucus that they have to change their ways. I mean, does it really take this kind of indictment to do that?

HENNINGER: It would help, I think, yeah. That's an argument. But the mindset of these public-sector politicians, like Ted Stevens, is that earmarks and pork are oxygen. And until that changes, it is going to be very hard for the Republicans to get back on their feet.

GIGOT: All right, Dan.

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


GIGOT: Winners and losers, picks and pans, "Hits and Misses," it's our way of calling attention to the best and the worst of the week.

Item one, a hit to New York's Democratic governor, David Paterson -- Dan?

HENNINGER: Pay attention because this doesn't happen very often. We are giving a big hit to a Democratic Democrat.

GIGOT: A New York Democrat.

HENNINGER: A New York Democrat. New York is facing a massive budget deficit. There is nothing surprising about that. But, Democratic Governor Paterson has proposed laying off workers, a hiring freeze, the lease or sale of some of the state's assets. And on taxes, that is when he said, "The reason I'm avoiding taxes, is because I think taxes are addictive."

Now, who is opposing him on this? The state's Senate majority leader, who is a Republican. He thinks laying off workers and selling state assets is a one-time fix and they don't work.

GIGOT: Laying off government workers?

HENNINGER: Government workers.

GIGOT: All right, next, the collapse of global free trade talks -- Mary?

O'GRADY: Yes, the collapse of international trade talks this week is a giant miss for all of the world's rich countries and poor countries alike. These talks have been going on since 2001. The idea was that poor countries were going to open their markets to manufacturing goods from the rich countries and to agricultural goods. And rich countries would open their markets to agricultural exports from the poor countries.

And India, in the end, led the charge to break down the talks. And what they said was that they refused to open their own markets -- and China and Brazil were in on this with them -- in order for U.S. agricultural products to come in.

This is a big miss, particularly for the developing world, because we know that trade is wealthy-creating. And now there won't be a round of international talks for a very long time.

GIGOT: All right, Mary, thanks.

Finally, congressional Democrats, leave town for August recess without an energy vote. John, does Nancy Pelosi have a political plan here?

FUND: Democrats get a big miss because they are not even stepping up to the plate. They left town without a vote. And it turns out that they are refusing to give any kind of vote on development of energy.

Now, the Democrats do have a strategy. It's alternative energy. It's conservation. It's beating up on speculators. In fact, one Democratic staffer went so far as to admit to The Hill newspaper, our energy strategy, have people drive small cars and wait for the wind.

And the Republicans found a picture of exactly that that they have been showing on the congressional floor and cable television. and it's a memorable photo.

GIGOT: But the closed down the budget process rather than allow a vote in both the House and the Senate.

FUND: The first time since the 1950s that's ever happened.

GIGOT: Wow, that's amazing.

Time for your "Hit or Miss" of the week.

Thomas Coughlin writes, "A huge miss to NBC, CBS and ABC for sending the top anchors to Europe on Obama's "Magical Mystery Tour." And not only is all this unbridled love apparent to journalists but also to the voters who generally start thinking they are getting the bum's rush by all the attention to one person."

Thanks, Thomas.

And remember, if you have your own "Hit or Miss," please send it to us at jer@foxnews.com or log onto opinionjournal.com. We'll read one or try to at the end of every show.

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 right here next week.

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