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CNBC TRANSCRIPT: CNBC'S LARRY KUDLOW SPEAKS WITH REPUBLICAN PRESIDENTIAL CANDIDATE MITT ROMNEY ON CNBC'S "THE KUDLOW REPORT" TONIGHT

WHEN: TONIGHT, WEDNESDAY, JANUARY 25TH

WHERE: CNBC'S "THE KUDLOW REPORT" AT 7PM ET

Following is the unofficial transcript of a CNBC interview with Republican Presidential Candidate Mitt Romney on CNBC's "The Kudlow Report." All references must be sourced to CNBC.

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LARRY KUDLOW, host: Governor Mitt Romney, welcome back to THE KUDLOW REPORT, sir. Thank you for doing this.

Former Governor MITT ROMNEY: Good to be here, Larry.

KUDLOW: I'd like to begin with President Obama's State of the Union speech last night, which really had a tremendous tone of class warfare, and I wanted to begin with the Warren Buffett tax and get your take on it. Anybody making a million dollars a year or more has to pay a minimum of the 30 percent tax rate, virtually no deductions. Your thought.

Gov. ROMNEY: Well, people who are earning ordinary income, of course, pay that level or higher. The question is whether you're going to say that we're going to eliminate the capital gains tax break. And what capital gains tax breaks have done over time is recognize there are two levels of taxation in capital gains. One at the corporate level, which is a 35 percent rate, and then another at the individual level, which has been 15 percent. So combined, it's about a 50 percent tax. So if you're going to say we're going to raise that dramatically, you're going to choke off a lot of the capital that goes into creating new enterprises and creating jobs. It's the wrong way to go.

KUDLOW: Wouldn't that same--it's an interesting point. For your own tax returns, when you came in, I'm going to call it 15 percent effective rate, most of that stuff is capital gains, but you're passed through the corporate tax. I did a calculation, it's about 45 percent combined corporate tax plus capital gains tax. Now, is Obama going after you? Is he going to try to make you the example of that as we get into this campaign? Is this Buffett Tax designed to come at you?

Gov. ROMNEY: Well, it's designed to come at me if I'm the nominee. If I happen not to be the nominee, he'll still take the 99 vs. 1 attack. I mean, he's really trying to divide America and to try and say that Republicans are all about the rich people. Look, Republicans are about middle class Americans. I'm fighting to help middle class Americans get better jobs and better incomes, and people who've been successful understand the path to success. We want everyone to enjoy success in America.

KUDLOW: So you disagree with the Buffett tax.

Gov. ROMNEY: Well, I think the idea of a Buffett tax, that we're going to raise taxes on capital gains would only make it harder for middle income Americans to find good jobs and get higher incomes. We want savings and investment to be given a break because it's taxed already at the corporate level, as you pointed out, a 45 percent combined rate. You want to raise that higher? You'll just choke off the growth of America's economy.

KUDLOW: And also, in terms of what President Obama said, he wants government action to close the inequality gap. That was a big part. Another thing he's going to do, he's got this big mortgage plan where he'd refi everybody's mortgage that's not--they can be underwater, but they have virtually no credit standards, probably a 4 percent interest rate. This came out of it. It had been speculated on before. Thirty million mortgage refinancing with a 4 percent interest rate. Now, is that vote buying? Is that election year vote buying? Is that something that's going to fix housing?

Gov. ROMNEY: Well, let's see what the plan looks like. If it's talking about multiple new trillions of dollars of government debt, that's something that simply is unacceptable.

KUDLOW: There's a bank tax in there to finance it.

Gov. ROMNEY: Well, again, let's look at the--let's look at the numbers, let's see what kind of tax there is. If you're talking about refinancing trillions of dollars of debt, and the government is now going to be taking over responsibility for those mortgages, that would be a real problem. But let's look at the details. Clearly, if there's a way of providing a break to homeowners to get lower interest rates, that's something which has always been part of the refinance story. If it can be done in a way that doesn't add additional government obligation, that's one thing. If it instead adds trillions of dollars in new debt to the federal balance sheet, that's a very different thing.

KUDLOW: And what about the investors who own the mortgage-backed securities that have to be repriced lower? They're going to take a bath. Savers are going to take a bath. Pension funds are going to take a bath.

Gov. ROMNEY: Yeah, again, I want to look at the plan. He just--in the speech last night, he just put in one or two sentences about it. Let's see what it shows. You have apparently more information about it than I do.

KUDLOW: Not necessarily.

Gov. ROMNEY: I want to see what the plan shows, but clearly you can't go in and say we're going to wipe out all the people who invested in mortgages and mortgage-backed securities. A lot of those are banks. Banks, in some cases, are in trouble already. You don't want them to have to find themselves in even more distress.

KUDLOW: I mean, really, when you step back and look, the president's saying the economy is getting better, OK? I want to get your take on that in a second. But the reason the economy has not been up to par and it's taken so long to get out of recession is too much income inequality. He blames banks for making bad loans, and he also blames manufacturers and other corporations for making their jobs offshore. That's kind of his analysis. What do you think?

Gov. ROMNEY: Well, if people agree with the president, that things really are doing well in this country, that we're on the right track, then they ought to vote for him. But I'm here in Florida, the people I've talked to here have lost homes, lost jobs, 18 percent of the people in this state are either out of work or underemployed, 18 percent, one out of five people almost. He is completely detached from the reality of what's happening in America. And his prescription, that somehow we need to find someone to blame, whether it's the bankers or people who make a lot of money, we've got to find someone to blame. Look, the leadership that's associated with the presidency suggests that he is the place and his desk is the place where the buck is to stop. And his policies have failed the American people. His--he has raised taxes on corporations, he's increased regulation, he's made it more difficult to get energy, and he's practiced crony capitalism. Those are the reasons it's been hard for this economy to turn around.

KUDLOW: I want to come back to crony capitalism, but I just want to ask, do you think, if you get the nomination and you run against President Obama, is free market capitalism and the free enterprise system going to be one of the very main issues? Is it, we're just going to have it out? Is that what you want to do? It's been in your speeches, it's been in your debate summaries, just let's have it out. Obama says 1 percent vs. 99 percent, class warfare and envy. You say no, we want success, we want free enterprise. Is that what this election is going to be about?

Gov. ROMNEY: I think you hit the nail on the head. This is an election about what is the course for America? What is the soul of America going to be? Are we going to be a nation which is led by government? As Mitch Daniels said last night, the trickle down government, is that what we want? Bigger and bigger government taking the larger and larger slice of America, depressing the opportunity for success in America, supplanting ambition with envy. Is that the kind of America we're going to have? That's the kind of America President Obama is creating. Or are we going to return to the principles of economic freedom and opportunity and free enterprise that has build the most--built the most powerful nation in the history of the Earth? I take the latter course. That's what I want to return to. I want those principles to work for the American people. Not because I want the rich to get richer. The rich are doing fine. I'm not worried about the 1 percent. I'm worried about the 99 percent. I want to help the 99 percent. But you don't help the 99 percent by attacking and creating warfare on the 1 percent.

KUDLOW: And how does the cronyism play into that? You've come out, you had a very good summary in one of your debates about cronyism, cronyism and insiderism in Washington.

Gov. ROMNEY: Yes.

KUDLOW: Special favors and carve-outs for either big business or big labor or big environmentalists. How does that play in to economic growth and your critique against Mr. Obama?

Gov. ROMNEY: Well, take a look at his investment in a company like Solyndra. He--we know it failed. But let's say it hadn't failed. Here's the rest of the story. There must've been 100 different solar energy entrepreneurs in the country trying to get capital to start their ideas and see which one might be best. The president chose one, Solyndra, gave them $500 million. Guess what happened to the other 99 when that happened? The other guys that were out looking for investment couldn't get it because all their investors looked and said, `The government's already picked the winner. How can we give you 1 or $2 million to pursue your solar idea when the government has chosen their winner?' The president playing venture capitalist kills the capacity of other entrepreneurs in the entire economy to create their visions and to build enterprises. The idea of government picking winners and losers kills the ability of the private sector to create the best ideas.

KUDLOW: Let me just stay with that. In terms of your field, the private equity field, so I want to come back to in another sense, but the carried interest rate deduction, or the interest rate scoring of capital gains, it was a little bit confusing. In The Wall Street Journal, it said you're considering you might abolish it if you're elected president. What's your position on carried interest for private equity, that being the investment portion taxed of capital gains?

Gov. ROMNEY: My view is that we don't raise taxes on any one. I'm not looking to single out some group of people and say let's raise taxes.

KUDLOW: So you keep the carried interest.

Gov. ROMNEY: Yes. If it--if it's actually a capital investment, and it's fairly priced at the time people invest in it, and then it rises in value as a capital gain, then you treat it as a capital gain. If someone turns it into what looks like ordinary income or a bonus, why then, obviously, it's not a capital gain. But to--you don't single out one kind of capital gain for different treatment from other types of capital gains.

KUDLOW: Now, just following on your cronyism and your defense of free market, do you need to be more prescriptive to link to ordinary people who may not be students of capitalism or--and Joseph Schumpeter, the creative destruction. In other words, how does the defense of free enterprise translate into jobs, economic growth, and prosperity? And most particularly, and I'm sure you know where I'm going on this, many of us want you to adopt a tax reform plan, a full-fledged tax reform plan, lower the rates, broaden the base. I know one of your advisers, Greg Mankiw of Harvard, just had a piece in the Sunday New York Times. Are you going to come out with a kind of phase two tax reform plan to say to people, `Here's specifically what I'm going to do.'

Gov. ROMNEY: Absolutely. Phase one is immediately saying to people making $200,000 and less, no tax on your savings, no tax on interest, dividends, or capital gains. And also, phase one, get the corporate tax rate competitive with the rates in Europe and the rest of the world, get it down to 25 percent. That's phase one. Phase two is to broaden the base. That means get rid of deductions and exemptions and loopholes and bring down the rates, the way Bowles-Simpson did.

KUDLOW: Right.

Gov. ROMNEY: Not identical to Bowles-Simpson. And we're working on various models that generate the revenue that we need, at the same time bring our rates down, and we'll be able to make some choices in that regard, but that's...

KUDLOW: When's phase two coming out?

Gov. ROMNEY: It's not ready yet, but it'll be ready at some point. Look, I...

KUDLOW: Will it be ready during the primary season?

Gov. ROMNEY: I presume so.

KUDLOW: Oh, so we'll wait to see that, but you wouldn't want to give us a date. You don't want to leak it here on THE KUDLOW REPORT.

Gov. ROMNEY: Well, I don't--you know, these things take modeling and analysis. You don't want to come out with something and say here's a great idea and then become the nominee against Obama and have him bash you over the head because this group of taxpayers somehow is getting paid more--are getting charged more. You want to make sure you've got your ducks in a row before you bring out a massive tax plan.

KUDLOW: Good. Does Gingrich have his ducks in a row on his 15 percent flat tax?

Gov. ROMNEY: No, I'm afraid he doesn't. The idea of saying that we're going to have people be able to choose the current tax system or a flat tax and go back and forth between the two every other year just doesn't make any sense at all because, obviously, what people would do is save all their deductions for one year and then use the current tax system where the deductions count. Then the next year they go into a flat tax system. You lose one of the greatest advantages of the flat tax, which is no longer creating discrimination in favor of one form of an investment or activity vs. another. The--his plan really has not been well-thought through.

KUDLOW: Does Gingrich have any plausibility? He's got this gold commission. He wants to explore linking the dollar to gold, although he hasn't really endorsed it. By the by, Ben Bernanke will speak today at the Federal Reserve meeting, and there's always issues about the dollar, which I call King Dollar. You looking at gold? You looking at a dollar link? What's your take on monetary policy and the Fed?

Gov. ROMNEY: You know, I'm happy to look at a whole range of ideas on how to have greater stability in our currency and in our monetary policies. I know that in the past when we had a gold standard, the idea that somehow it was detached from or free from any interference by Congress was simply wrong because even with the gold standard someone has to decide what is the conversion rate between the gold and the dollar.

KUDLOW: Hm.

Gov. ROMNEY: And Congress can inflate the dollar simply by changing the exchange rate, as was done in the past. So I don't think there's any, if you will, magic bullet substitute for economic restraint, for not spending more money than you take in, for having the nation that's the most productive in the entire world. That's how you get wealth for the middle class is making America a more productive nation with high savings rates and a government that only spends what it takes in.

KUDLOW: But are you staying with your view that came out in one of the earlier debates that you would not reappoint Ben Bernanke?

Gov. ROMNEY: I'd like to appoint my own person. If I became president of the United States, I'd like to have a Fed chairman that shares my views and that I have confidence in. And there are things that, obviously, in the past, I think the Fed has made a number of mistakes. I don't know that you're going to avoid making mistakes, but I'd like to have someone new in that position.

KUDLOW: And finally, before you get to Obama, you've got to get through Newt Gingrich, and we talked about Newt's gold idea and his flat tax, with which you apparently disagree. The latest flap down here, as I understand it, Newt says you've hired former Governor Charlie Crist's staff people. Crist was a liberal Republican, who became an independent and that shows that for sure you are, in fact, a Massachusetts moderate. What's your take on that? Can you give us a response to this latest round of Gingrich charges?

Gov. ROMNEY: It's a little loony. I've got staff members from the Reagan years, from the Bush years, from my years in Massachusetts. I've got staff members that come from all sorts of prior campaigns. That's the nature of a campaign. My guess is that he has staff members that came from various campaigns. Now, I guess a lot of his staff left him, so he's probably kind of fixated on staff, but frankly, I'm more concerned with the candidate than I am with the staff. And in the case of Speaker Gingrich, his background, when he was the leader of our party--he had four years when he was leader of our party, it was a disaster. At the end of four years, he not only had to resign in disgrace, his approval rating had dropped to 18 percent. We had lost at an historical rate in a midterm election. His leadership was a failed example of leadership. We simply can't have Newt Gingrich take the responsibility of leading our party again. It would be a very serious mistake.

KUDLOW: I always wondered, when Newt was hammering you for private equity and whatever his vulture capitalism and looting and corporate raiders, which caused a tremendous uproar among conservatives, including myself, and we all sprang to the defense of free market capitalism, but why don't you--one of your responses--OK, so you ran Bain Capital, you ran Bain Capital. It's a class--you're a turnaround expert. There's this incredibly troubled company, it's called USA Government Inc. It's virtually bankrupt, it's not functioning, it's on life support. Wouldn't your experience from Bain Capital as a turnaround guy and restructuring guy be ideal to solve the problems that we're facing now in the USA and for this bankrupt firm called US Government Inc. Why don't you make that response?

Gov. ROMNEY: That's an awful good way of describing it. And, Larry, you're absolutely right. The reason my wife...

KUDLOW: I mean, a lot of us have thought this.

Gov. ROMNEY: This--sure. Well, that's...

KUDLOW: This is what the guy does.

Gov. ROMNEY: That's--and that--look, that's why my wife said, `Mitt, you've got to get in here.' I've had the experience of turning around industry at the corporate level, and then I helped turn around the Olympics, and then I helped turn around the state of Massachusetts. It's what I do.

KUDLOW: Hm.

Gov. ROMNEY: And this country's in trouble. You've obviously read Mary Meeker's first book, "USA Incorporated." America is on a road to bankruptcy, to economic calamity, and we have people who just keep on saying things are going well, like the president last night. He's detached from reality. He's detached from the people of America. He needs to get out and meet some people who are out of work and understand why they're out of work. I understand what it's going to take to get America working again, and one part of that is reining in a government that's completely out of control.

KUDLOW: All right. We'll leave it there. Governor Mitt Romney, thank you very much. All best on the campaign trail.

Gov. ROMNEY: Thanks, Larry, good to be with you.

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