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Steffanie Marchese
Senate Minority Leader Mitch McConnell (R-KY)
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WHEN: Tonight, Tuesday, September 14th at 7pm ET

WHERE: CNBC's “The Kudlow Report”

Following is the unofficial transcript of a CNBC interview with Senator Mitch McConnell tonight, Tuesday, September 14th on CNBC's "The Kudlow Report" at 7pm ET.

All references must be sourced to CNBC.


LARRY KUDLOW, host: Good evening, everyone. I'm Larry Kudlow. Welcome back to THE KUDLOW REPORT, where we still believe free market capitalism is the best path to prosperity.

All right, topic A this evening. Senate Republican Leader Mitch McConnell's tax rate freeze has unleashed a political thunderbolt in Washington. Is the Obama plan for higher tax rates on the wealthy dead in the water, at least before the election? Or might there even be a big bang tax deal in the works? I'm going to talk to Senator McConnell about this very subject in just a moment, but first up let's get some rundown on the tax wars from CNBC's Eamon Javers in Washington.

Good evening, Eamon.

EAMON JAVERS reporting: Hey, Larry. Well, the United States Senate came back into session today with dueling sound bites from Senate leaders over the fate of the Bush tax cuts. First up, as you mentioned, was Senator Mitch McConnell, who said all the momentum is on his side of the argument.

Senator MITCH McCONNELL: I think I've made it crystal clear, the Republican conference believes that raising taxes on anybody in the middle of a recession is a bad idea; and it's not just us, you've got five, six, seven Democrats who also agree with that. And that's the starting place.

JAVERS: Meanwhile, Senate Democratic Leader Harry Reid came out addressing reporters today, and said in his view this is all about the fate of the middle class.

Senator HARRY REID: That is, everyone knows my Republican colleagues are promising to hold hostage the economic security of the middle class. They're threatening, and I think proudly so, to raise taxes on the vast majority of Americans. They say that until millionaires get what they want, the middle class won't get what they need.

JAVERS: Larry, both sides seem to like their talking points here going into this fall campaign in this battle over tax cuts. And I talked to one Democrat today who said they're thinking about using the acronym TARP and calling this tax assistance for rich people. They like the idea of Republicans going to bat for tax cuts for the rich so much, they want to use it as a campaign talking point.

KUDLOW: All right, Eamon. Sounds like a nonstarter, but I hear you. Thank you very much for the report.

So, folks, is there a big bang tax deal in the works? I'd like to introduce the most powerful tax man in Washington right now. Please welcome back to the program Senator, Republican Leader, Mitch McConnell of Kentucky.

Mr. Leader, thank you for giving us your time.

Sen. McCONNELL: Glad to be with you, Larry.

KUDLOW: All right, you really did unleash a thunderbolt yesterday on your speech on the floor of the Senate. I'll just read the key line. "No one will pay higher income taxes next year." You are proposing legislation. Can you give us some of the legislative details?

Sen. McCONNELL: Well, what we know, Larry, is that the tax rate for 10 years has been set, and what the Democrats want to have now, ironically within six weeks of the election, is a debate about whether it's a good idea to raise taxes on anybody in the middle of what most Americans think is a recession. Well, they say it only affects the rich. Well, let's take a look at who is affected by the top two rates going up. It hits 50 percent of small business income and 25 percent of the work force. And, of course, our friends on the other side say, well, it's only 3 percent of small businesses. Larry, you'd be interested to know--and you probably already know that's 750,000 small businesses in America, the most productive, the ones that are the most successful, getting hit by a tax increase on top of everything that--else that's happened to them in the last 18 months of this administration.

KUDLOW: So let me just ask you, are you--is your bill to extend for a year or two? Is your bill a permanent extension? How is this going to play out, sir?

Sen. McCONNELL: It would be a permanent extension. What we wish we could have done in 2001 and 2002, but we couldn't get 60 votes for a permanent extension, we could only get a smaller number of votes to do it for a period of time. We believe the best policy, not only for economic recovery but for the long-term future of America, is to keep these tax rates where they are. The Democrats believe that what this sluggish economy needs is a tax increase.I think that's utter nonsense.

KUDLOW: You've got some Democrats, as you mentioned in the news clip, five, six or seven Democrats, including Senator Joe Lieberman, who are opting out on your side, but they want a temporary extension of one or two years. There's a gaggle of Democrats in the House who say likewise. Would you be willing to compromise on some kind of temporary extension?

Sen. McCONNELL: Well, look, I'm not going to engage in that kind of hypothetical. I do think it's encouraging, however, that there's bipartisan agreement that raising taxes in the middle of this recession is a bad idea. And there's five to seven Democrats in the Senate, a number in the House, who feel the same way. I think the momentum is on our side, not on the other side.

KUDLOW: You know, a lot of observers say you do have the votes to block what I guess will be President Obama's bill, although as far as I know, Harry Reid has not put a bill yet in, but to just allow the tax cuts to be extended for the middle class and to raise tax rates on the small businesses and the wealthy and the investors, as you have pointed out. Do you have the votes to block? Is that the first order of business?

Sen. McCONNELL: Well, what I'm hoping we're all going to agree to do here, at least 60 of the 100 of us are going to agree to do, is to extend the current tax rate. I'd like to see that done permanently. At least there are five to seven Democrats who agree that it's a good idea, at the very least not to do it right now. So I'm hoping that that will end up being the--being the prevailing point of view, Larry.

KUDLOW: What happens--OK, I'm not sure--what happens if full extension fails? You then go into a temporary extension?

Sen. McCONNELL: You're asking me all kinds of hypotheticals. I'm going to--I'm not going to answer the hypotheticals. I'm going to tell you what I think is good policy for America. I'm going to continue to try to convince as many Democrats as possible who share that view to join us. And my hope is that at the end of the day we will make these--the current tax rate permanent. This is not a debate about tax cuts, this is a debate about tax increases in the middle of a recession. We think it's a terrible idea. I think the momentum is on our side. And we'll see what happens in the next week or two. Give it--the American people a chance to be heard from. We don't exist in a vacuum up here. We do listen to the American people, and I'm hopeful they'll be on our side on this.

KUDLOW: The reason I'm asking these specifics, I'm not here to be a nitpicker, but you've got a lot of investors, millions of investors, who have to make tax planning decisions, possibly tax selling decisions before year end. The Bush tax cuts, as you well know, sir, expire at the end of this year. So people are asking, they say, OK, Mr. McConnell's got a lot of momentum. He's got Democratic support. He can block the tax increases on the wealthy, but can he pass the extension? That's really what people are going to ask. If your first bill fails for a permanent extension, would you come back then and work with Democrats on a temporary extension?

Sen. McCONNELL: Well, look, I'm--I can't--I can't satisfy that level of uncertainty right now. I can only tell you how I feel about it. And we're hoping the momentum would build behind extension of the current tax rates without any tax increases on anybody, but I can't--I don't want to speculate about the ultimate outcome. I can tell you what I think ought to be done, and I can also tell you there are a growing number of Democrats who agree with me, and we're going to try to accomplish that as soon as possible.

KUDLOW: And you--what you think ought to be done is a--is a permanent extension. That's your...

Sen. McCONNELL: That's what I would do, a permanent extension.

KUDLOW: All right, let me...

Sen. McCONNELL: There are Democrats--there are Democrats saying they would at least do it for a couple of years. I would prefer to do it permanently. I'd love to negotiate the deal with you, Larry. I think we'd come up with a good deal. But I can't do that tonight.

KUDLOW: Well, Senator, I would start with a temporary extension and then move on to flat tax reform. Your thought?

Sen. McCONNELL: That'd be a step in the right direction. We're just trying to get tax rates not to go up right now. I mean, these guys--you know, these guys have been on a spending binge for the last 18 months, and now they want to try to pay for some of their spending binge by raising taxes on small businesses in the middle of a recession. I think that is an incredibly bad idea. I suspect you think it is, as well. And we're going to see what we can do to succeed.

KUDLOW: Let me ask two more questions, Senator, and I know your time is short. We appreciate it. Number one, Mr. Boehner over in the House wants to freeze the budget at 2008 prestimulus levels. That would probably come over a period of years to over $1 trillion in budgetary savings. Would this be part of your package? Do you support the 2008 budget freeze?

Sen. McCONNELL: Yeah, I like a budget freeze. We're not in the majority right now. If I could do it, if we had a majority in the House and Senate, I like a 2008 freeze. We've actually made some progress on that over on the Senate side, even with a Senate of 59 Democrats and 41 Republicans. The--we're going to get what's called the Sessions-McCaskill freeze, which has passed the Senate several times, which is close to a freeze this year over last year. Even out of 59 Democrats, if we were in a robust position in the Senate and the House, I would love to have an even lower freeze at the level that Leader Boehner has suggested.

KUDLOW: And last one, sir, the House Republicans are talking about putting out a, you know, pre-election policy agenda statement in the next couple weeks. Will you be joining them in that statement?

Sen. McCONNELL: Yeah, we're in--we're in those discussions with them, and I think whatever is ultimately done will be done on a joint Senate-House Republican basis.

KUDLOW: And when do you reckon that'll be?

Sen. McCONNELL: We'll let you know.

KUDLOW: What's the--what's the lead on this? This is--you're breaking some news here because we didn't hear you before commit to this. What will the lead topics be on this midterm policy agenda?

Sen. McCONNELL: Well, we're not going to scoop ourselves, Larry. We'll be addressing that sometime in the next few weeks.

KUDLOW: But am I guessing right that it's going to circle around the economy, jobs, taxes and spending? Is that a fair guess?

Sen. McCONNELL: Well, I think it'll certainly address the issues that are on people's minds. And we know that that's jobs, we know that it's spending, we know that it's debt. Those are the sign of--kind of things the American people are focused on. Senate and the House Republicans are focused on that, as well. That'll be a part of what we have to say later.

KUDLOW: All right, Senator Mitch McConnell, we appreciate the time very much. Thanks for joining THE KUDLOW REPORT.

Sen. McCONNELL: Thank you, Larry.

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