This is a rush transcript from "Special Report With Bret Baier," September 13, 2010. This copy may not be in its final form and may be updated.


PRESIDENT BARACK OBAMA: We're still in this wrestling match with J ohn Boehner and Mitch McConnell about the last two to three percent where on average we'd be giving them $100,000 for people making a million dollars or more. We'd have to borrow $700 billion over the course of ten years, and we just can't afford it.

HOUSE MINORITY LEADER JOHN BOEHNER, R-OHIO: We don't know what the bill is going to say, all right? If the only option I have is to vote for those $250,000 and below, of course I'm going to do that, but I'm going to do everything I can to fight and make sure we extend the current tax rates for all Americans.

SENATE MINORITY LEADER MITCH MCCONNELL, R-KY.: I'm introducing legislation today that ensures that no one in this country will pay higher income taxes next year than they are right now.


BRET BAIER, ANCHOR: It's all about extending the Bush era tax cuts and the real contention is over the top tier of those tax cuts, whether to extend them. The White House is trying to drive a wedge between Republicans today. This is from Robert Gibbs, a tweet earlier today. The White House Press Secretary saying "Disarray equals Boehner versus Cantor," Eric cantor of course, congressman from Virginia, "Boehner versus McConnell, and McConnell versus McConnell. Why hold middle class tax cuts hostage to these disagreements?"

The White House blog saying roughly the same thing, Dan Pfeiffer, the White House communications director. And then you had a letter to the House Democratic leadership from a group of moderate Democrats today saying this, quote, "We believe in times of economic recovery it makes good sense to maintain things as they are in the short-term to provide families and businesses the certainty required to plan and make sound budget decisions, providing the certainty will give small businesses the backbone of our economic recovery, confidence and stability." That's from a group of moderate Democrats. And in the Senate, you have a growing list of Democrats, five of them now, senators, who support extending all the tax cuts at least temporarily.

With all of that preamble, we bring in our panel, Bill Kristol, editor of The Weekly Standard, Juan Williams, news analyst for National Public Radio, and syndicated columnist Charles Krauthammer. Bill?

BILL KRISTOL, EDITOR, THE WEEKLY STANDARD: I think John Boehner made a little bit of a mistake yesterday, opening the door to President Obama's proposal. And there is no need to concede now that if it came to a final vote, a vote on a final passage that he would be for only the middle class tax cuts. For now I think the Republicans position should be, I think they could win on this, no tax increase in a recession, period. And in fact, Boehner walked his statement back a little bit and then Mitch McConnell and others Eric Cantor and tried to make it clear that Republicans would welcome a fight with president Obama whether there should be a tax increase in the midst of a recession.

BAIER: So you don't think by saying what he said it took steam out of the argument that the Republicans were holding hostage the Bush tax cuts?

KRISTOL: I don't think so. I know some people think that was clever of Boehner to sidestep this trap. I don't agree with that. Republican are winning the argument on taxes. They are winning the argument on taxes. If you are winning the argument on taxes you don't need to be super clever, sort of like a football team and gaining seven yards a rush. You can't rush every down and let's have pass plays and mix it up and suddenly you're having pass plays and passes are falling incomplete and you've lost the rushing game. If you're winning, stick with what you've got going. They're back I think to the core argument, which is don't raise taxes in a recession.

BAIER: Juan, the White House wants to hype up this position, as they see it. The Republicans up on the Hill say there is no division on substance, but really on strategy, that Boehner wants all of the tax cuts extended, but he, perhaps, is willing to vote for something short of that, even though the Senate will not.

What about that explanation? Is there one there?

JUAN WILLIAMS, NEWS ANALYST, NATIONAL PUBLIC RADIO: Well, I think that given the offensive that the president and White House were on last week, I think it's paid off for them. I think that there was a trap set and, as Bill said, I think that Minority Leader Boehner stepped in it.

But you know, it's not only Boehner. If you look, Newt Gingrich said much the same thing on "Fox News Sunday," that Republicans have got to pass any tax cut as long as there's no tax hike attached to it to fund it, that anything that would allow the White House to get behind the tax cut has to be passed by Republicans who want to be in the posture of saying we support tax cuts for the American middle class.

But what the White House has done is put Republicans in a posture where now, I think, the president and the Democrats are going to be able to say we delivered for middle class voters, and we protected you against tax cuts for the very rich.

That's not -- I mean, to me this is smart politics by the White House, a last gasp effort because they've got nothing else going at the moment as we approach November. But it seems to me the first time the Republicans are on the defensive and the White House can go out and say we got Boehner versus McConnell. You know, forget the conservative Democrats that you mentioned, by the way.

BAIER: Right.

WILLIAMS: They're not in this match at all.

BAIER: This is what the minority leaders spokesman says, "I wonder if the president is wrestling with the growing chorus of Democrats opposed to his plan to raise taxes." That's how they're pushing back.

Charles, the small business element, you've talked about here, 50 percent of the income from small businesses is in the three percent of the top tier that would be taxed, the increase.

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: That's why a majority of economists would oppose raising these taxes, like Peter Orszag, the head of the budget office in the Obama administration, has argued against raising taxes on the upper three percent because, as you say, that's half small business income in America precisely at a time when you want the money in their pocket so they can hire.

Instead, what the Obama administration proposes a classic liberal approach. Which is where we'll tax you, take the money, and then we may lend you some of it back with interest if you're really nice and particularly obsequious in asking in your application for a loan, which is exactly how they want a $30 billion window to establish loans for establish small businesses. Let them keep it in their pocket.

And under the loan program and under the targeted tax cut program which the administration is also touting as a boon to small business, they will have to invest the money according to the dictates of experts in Washington and not allocating the capital in a way that is most advantageous to their own business, which is what you would have if you did not have the tax hike. That's the economic argument.

But I would say in the Boehner political argument, I would take the strategic retreat. I think he shouldn't have shown his hand early, but in the end if you're going to have a vote in the House and the Democrats control the procedures in the House, you can have a vote where your only choice is to vote up and down on the middle class tax cut, you have to vote yes, otherwise you're gratuitously allowing the Democrats an issue in an election where they cannot defend what they have done with the economy over the last 18 months.

BAIER: Because Bill, on the Senate side you have to get through the Senate anyway. You have five moderate Democrats already on the board saying we want all the tax cuts extended. And it'd be tough to get to 60, wouldn't it, in the Senate.

KRISTOL: Maybe, but why give it up in the House? It's tough to give the 40 plus House Democrats to vote, against reasons, Charles eloquently laid out, to vote for a tax increase on the wealthy. I think it's a mistake tactically for Boehner to show his hand this early.

And I'm not even so sure at the end of the day you don't say I'm sorry, we're not voting implicitly or explicitly for any tax increase in a recession, only the middle class rates where they are, is to vote implicitly for a tax hike on the wealthy. And as soon as you give us a majority we will come in and retroactively repeal this and hold taxes where they are. I would be tougher on it.

But I think it's a tactical issue and political issue. At the end of the day, the truth is that the Democrats are in disarray as well as, which is all the more reasons for the Republicans to hold back. The Democrats have the table to bill. There's no bill.

BAIER: There's no bill, except for the bill that McConnell put forward today.

KRISTOL: Make the Democrats step forward with their bill and then insist on an amendment process where you get up or down in both bodies on a full no tax hike versus the Democrats.

WILLIAMS: But that allows the Democrats then to say that Republicans are blocking a tax cut for most Americans, and in response to you, they're offing tax cuts to small business specifically. I don't know what economists you guys are checking with, but it seems to me the one or two percent of Americans who make more than $250,000 are not 50 percent of America's small businesses owners.

KRAUTHAMMER: -- targeted, limited, dictated, and ineffective. Let them have the money don't raise the tax cuts.

WILLIAMS: It's a tax cut, a tax cut for business, and I might add real quickly, Democrats are going to go after globalization. This is an economic offensive by the Democrats in the fall.

BAIER: Last word, Bill.

KRISTOL: Look, given how horrible position the Obama White House is in, it's not foolish of them to play this card and it revs up their base.

BAIER: It revs up Juan.

WILLIAMS: Juan Williams.

KRISTOL: It's a game they're playing.

BAIER: Tell us who you think will benefit most from the tax cut debate. Logon to our home page at FOXnews.com/Special Report and vote in our online poll. Up next, politics and Tuesday's primaries.



CHRISTINE O'DONNELL, DELAWARE REPUBLICAN SENATORICAL CANDIDATE: No one thought that we could get this far in the primaries, those same so-called experts are the ones who are trying to say we can't win the general. I believe we can.

REP. MIKE CASTLE, R-DEL., U.S. SENATE CANDIDATE: She has a lot of strikes against her, maybe more than three strikes against her with respect to her finances. And if you translate that into making decisions as far as the government is concerned, I think it will be problematical.


BAIER: A big primary night on Tuesday, there you see them -- Delaware, Maryland, New Hampshire, Rhode Island, the District of Columbia, here, Massachusetts, New York, and Wisconsin, the last really big night of primaries. And in Delaware you just heard from the two candidates there going head to head. Christine O'Donnell leading long time congressman and former governor Mike Castle 47-44 in the latest poll that is out. What about all these races as we set up this primary night. We're back with the panel. Charles, let's start in Delaware.

KRAUTHAMMER: Speaking as one of those "so-called experts," the Palin endorsement I think is disruptive and capricious. Bill Buckley had a rule he always supported the most conservative candidate who was electable, otherwise the vote is simply self-indulgence.

BAIER: Now, Jim DeMint from South Carolina also endorsed Christine O'Donnell.

KRAUTHAMMER: Equally capricious and irresponsible. I'm not sexist on this. It's a big mistake. Mike Castle is a shoo-in. He wins -- they call off the fight in the first round. O'Donnell is very problematic, she probably will lose. Now, we are in a cycle where we have seen that this is not a normal Democratic administration. It's highly ideological. It's instituted changes over the last 18 months that are structural and some of them reversible like Obama care and it will try to do the same in the next two years or six. If you're a Republican and you're a conservative, you want a majority in the Senate that will stop that agenda and you have to elect the most electable. Delaware is not Alaska. In Alaska you can endorse Joe Miller who is going to win anyway, even though he's more conservative. In Delaware, O'Donnell is going to lose, and that could be the difference between a Republican and Democratic control and make a difference about the Obama agenda in the future.

BAIER: Juan, the tea party express spending $225,000 on O'Donnell's campaign for ads for the campaign, but another element of the tea party movement, Freedom Works, which you see the different tea party elements, led by Dick Armey, say they refuse to endorse O'Donnell because of that very point that Charles raises.

WILLIAMS: Well, and you hear from the Republican establishment in the state is they don't think O'Donnell can win against Chris Toomey, who is a moderate democrat in the state.

You know, sitting here as an outsider, I'm going to let Charles and Bill have the floor. It's amazing to me -- the tea party people are trying to reform the Republican Party. Sometimes we overlook this. They are not comfortable with much of the Republican establishment. They think that Republicans should be more aggressive and harder on everything from the Obama administration to taxes. They don't want to at all put themselves in the position of playing normal Washington ways. So they're going after the Republican establishment, which is not very popular. Republicans remember, if you asked voters what do you think about Democrats in Congress, way down there, but Republicans in Congress are even lower.

BAIER: Quickly to New Hampshire and the setup there.

KRISTOL: There, Sarah Palin endorsed Kelly Ayotte who I think would probably be the strongest candidate, who's quite conservative, who's been attacked from the right, I think unjustly so. I think she'll win. I actually think that Castle may pull it out in Delaware just because he's been governor and he's been elected state wide. I think he's more popular than a typical sort of liberal Republican who has no roots in the state.

And I think Delaware Republicans can -- even if you're very conservative Delaware Republican you can honestly say to yourself, you know what we prefer to have 51 U.S. senators and there is a very good chance that Mike Castle could be one of those and a very small chance that Christine O'Donnell could be.

BAIER: And yet in the polls it continues to tick up.

KRISTOL: In the past the insurgent candidates if he or she is close on Election Day, has won. On the other hand, I just don't know, but in Delaware, I think that Castle is stronger than the other candidates have been in comparable races, but we'll see.

BAIER: OK, and we will have full coverage of course on Fox News Channel all night long during prime time hours.

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