Larry Kudlow Speaks with Republican Presidential Candidate John McCain on "Kudlow & Company" (Transcript Included)

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WHEN: Tuesday, December 18th at 7:00PM ET
WHERE: "Kudlow & Company"

The following is the unofficial transcript of a CNBC interview with Republican Presidential Candidate John McCain on CNBC's "Kudlow & Company." All references must be sourced to CNBC.

In the interview with CNBC's Larry Kudlow, McCain discusses where he stands in the polls and his reaction to his endorsements by key newspapers in Iowa and New Hampshire, his economic plan, trade policy with China, the Federal budget and Congressional spending and immigration, among other topics.

Senator JOHN McCAIN: I believe that free markets should play, and I would phase out agricultural subsidies, including cotton subsidies in my own state, and particularly sugar subsidies, which really distort the market because American consumers pay more for every product that has sugar in it. So I would have to say in Iowa, some of my positions get mixed reviews. But I'm very grateful to have the--very appreciative of having the endorsement of The Des Moines Register. I was--I was very grateful for that.

LARRY KUDLOW, host:

Let me ask you--there's a couple of things here. First of all, on the spending restraint, there's a bill coming out now, this omnibus spending bill, which has moved a bit in President Bush's direction. But Senator Tom Coburn and Senator Jim DeMint, two spending hard-liners who I think are allies of yours in the Senate...

Sen. McCAIN: Yes.

KUDLOW: ...they are recommending that the president veto this omnibus bill because there are 9,000 earmarks summing to $8 billion. Are you going to vote against this bill? Would that be a marker in the sand for your campaign?

Sen. McCAIN: Yes. Yes. Yes, it would. I appreciate Senator Coburn, Senator DeMint and others, and I could not be more grateful. But I want to tell you, I was fighting this fight long before they came to the Senate. I fought against the earmarks and the pork barrel spending. I saved the taxpayers $2 billion on a bogus Air Force tanker deal, and one of the leading appropriators used to call me "The Sheriff." And I have a proven record of fighting against pork barrel spending practices and also for unfund--programs with unfunded liability associated with them. I voted against the Medicare prescription drug bill because it was a trillion dollars in unfunded liability. Plus, it was badly distorted as to who really needed it, as you know. But--so I have a record and I would hope that the investor class would recognize that I'll get our fiscal house in order. I know how it works. I know where the bodies are buried and I know how to motivate them.

KUDLOW: Yeah. So therefore, you are going to vote against this bill, with all the earmarks.

Sen. McCAIN: Oh, yeah, sure.

KUDLOW: All right. Good. I just want to get that down.

I mean, is part of your case here, as I--as I listen to you--and we've talked before about this--that the guy is going to hold down spending, or heaven forbid the guy that might even cut some spending, is more likely to be the guy who's going to keep taxes low? Is that one of your themes?

Sen. McCAIN: Oh, yeah. Look, you just mentioned a lot of the uncertainty out there, Larry. Whether it's justified or not is--you know, we could go into each one of the aspects of Americans'--America's economy, which I believe is fundamentally very sound, by the way. But to raise taxes at this moment in time, I think, would be--would be the worst effect. I'm against tax increases at any time, but right now there's no worse outcome I could think of than raising taxes at this particular moment in time. And I'm against them at all times, but right now would be the worst time.

KUDLOW: Well, look, Hillary Clinton was up here on Wall Street, what, about a week or 10 days ago. She blames Wall Street for a big chunk of the subprime problem. Governor Huckabee was on this program about 10 days ago. He attacked corporate CEOs and he said they're getting paid too much and the whole system is wrong. And if he had to, he says, if he had to, he would actually bring government in to stop their pay. What do you make of that? Everybody's attacking Wall Street. Huckabee's attacking CEOs. I dare say that's not what the investor class wants to hear.

Sen. McCAIN: Well, let me say that we've got to return to one fundamental principle, and that is don't lend money to people who can't pay it back. And I know that's a simplistic statement, but that really is the root of this problem with subprime lending, as you well know. I believe that we ought to, at this time, encourage investment in savings. And one of the ways we could do that is to reform the tax code. And my first target, frankly, is the AMT because it's about to engulf 20 million Americans, a tax that was originally designed, as you know, for a handful of very rich people. We've got to--we've got to eliminate this gradually. It's got--can't be done immediately, but it--going from the lower-income people up, eliminate the AMT.

KUDLOW: You talk about reform the code. Are we talking Huckabee's fair tax? The national sales tax? Are you talking about a Steve Forbes-type flat tax? Fred Thompson's come out for a quasi flat tax. Which direction do you want to move on that tax reform?

Sen. McCAIN: Larry, I want--I want to convene a commission with Alan Greenspan on it and you--I'm sure that it'll be a very calm and unemotional gathering with you there...

KUDLOW: (Laughs)

Sen. McCAIN: ...and have that commission report out their recommendations but have a provision like the base closing commission, that Congress within 60 days has to vote up or down. Up or down. You know, we had a very good tax reform commission that reported out a year and a half ago, and you know what happened to that. There's got to be some teeth in it.

By the way, on the fair tax, I suggest before someone embraces that, I'd like for them to read a number of the articles that are by noted economists, especially in The Wall Street Journal. The parameters of that and the outcome of it, I frank--I think, frankly, should give us all great concern.

KUDLOW: All right, so scratch the fair tax. But let me just come back to the other. You're going to call for another tax reform commission. I mean, with all respect, isn't that a little bit of a cop-out? We've had a lot of these commissions down through the years.

Sen. McCAIN: Mm-hmm.

KUDLOW: We probably know more about commissioning on taxes and other things. Don't we need some action? I mean, you know, Reagan said, `Come to me. Here's what I stand for, A, B, C, D.'

Sen. McCAIN: Yeah.

KUDLOW: Don't you want to put your plan on the table and say, `Hey, here's what I stand for. Come to me'?

Sen. McCAIN: Fairer, flatter, simpler tax code. But look, it's incredibly complex. And the difference, I think, between that and the past, again, is that to force Congress to give--to have an up or down vote. I--look, I've got a long record of supporting tax cuts, opposing tax increases. But I think that if you're going to come up with a real answer, it's going to have to be simpler, fairer and flatter. And I'd like to have the input not only of people who are well informed, but also put some teeth in that commission. I'll come up with a lot of proposals, and have in the past, to make the tax code fairer and flatter. But where does it go unless we get it through Congress, Larry? That's--my object is to get it through the Congress. The last time we had tax simplification, as you know, was 1986, 21 years ago. So I'd like to tell you that I can get something past the special interests in Congress, but I'd like to make sure that I can. See what I mean?

KUDLOW: I do, but you mentioned you'd have Alan Greenspan chair it. Now, Mr. Greenspan's a distinguished man, but day before yesterday on one of the Sunday talk shows, he comes out for a direct, massive big-government bailout of homeowners. I don't know, I think he's lost his mind or he's had temporary amnesia or something. You sure you want to go down that Greenspan path?

Sen. McCAIN: Well, he's got a good record, as you know, for a lot of years, but he wouldn't be the sole member, obviously. We'd have--we'd have jerks like you on it so that it would give it the balance that...

KUDLOW: (Laughs) What about Greenspan's bailout of homeowners? What do you make of that?

Sen. McCAIN: I don't know what to make of it. I'm really--I'm working on a proposal right now with my friend Senator Phil Gramm and some others, but I believe that the lesson of the past is you have consequences that are intended and those that are unintended. In the S&L bailout, as you know, we saved the--we helped the economy but we wasted billions and billions of dollars. With Sarbanes-Oxley we obviously had the unintended consequences associated with audit. So I believe that government action is the last resort and not the first resort, and I'd like to see Paulson's plan at least have a chance...

KUDLOW: Yeah.

Sen. McCAIN: ...before we reject it out of hand. You see my point?

KUDLOW: I do see your point, and I--let me ask you about the Paulson plan. I mean, would a President McCain want anything more? Paulson's the guy who seems to be using voluntary methods, some modifying of the contracts, which is inside the law, and he just might be able to help a few homeowners hang on to the roof over their head. He is being attacked by some pure conservatives. Are you behind the Paulson plan?

Sen. McCAIN: Look, if I had a good answer, which I'm working on now, I'd be on much firmer grounds morally. I think that Paulson is highly respected throughout the world, not just in the United States of America, and that matters because, as we know, this has become a global issue...

KUDLOW: Yeah.

Sen. McCAIN: ...when a town in Norway suffers the consequences of a subprime lending problem. So I'd like to give it a chance. I don't know if it's going to work or not, but it seems to me it's a step that we should try and see that if we can get enough people to sit down with the lender in order to be able to stay in their own homes. You know, in the old days, the S&L, it was in the interest of the S&L and the borrower to work things out. Unfortunately, that's not the case today. What we're trying to find is that incentive to make sure that happens, but again--look, Larry, me speaking to you about Wall Street is a little bit presumptuous, but a lot of this stuff is psychological, as you well know, rather than based on reality.

KUDLOW: Yeah.

Sen. McCAIN: I think we also ought to keep reassuring Wall Street and the American people that the fundamental underpinnings of the American economy is very strong. We're the greatest innovator, the greatest exporter, the greatest importer, etc., etc., and we can rely on those underpinnings to get us through this if we do it right.

KUDLOW: Let me pitch you a classic Democratic pessimistic statement from Senator Charles Schumer, who was on this network yesterday. He says the following, "Bush administration continues to see the economy through rose-colored glasses, whether it's subprime crisis, the credit crisis, the energy crisis, the declining dollar, or it just blithely marches on without making any serious effort to solve these economic problems." What would your response be to Mr. Schumer?

Sen. McCAIN: My response is take a trip out Silicon Valley. Take a trip to many of the small businesses and enterprises that are--that are growing and look at our revenues, which are dramatically increasing as a result of the exports of the quality products that can compete around the world. Look at the young men and women who are not only on Wall Street but every small and big business in America. Look at our fundamental underpinnings of our economy and the fact that, still, every innovation in the cutting edge of high technology still comes from the United States of America. Do we have challenges? Yes. I'm not looking through rose-colored glasses. We've got to continue education reform, we've got to do a lot better job on health care reform, fix these unfunded liabilities with Social Security and Medicare, but I see no problem--I see no problem that we can't surmount with the American people working together, and I see a very bright future for us in the information technology revolution which the world is going through today.

KUDLOW: Let me just fire a couple of quick ones at you. Maybe you'll just fire them right back. Lot of people think Fed Chairman Ben Bernanke is too timid on this housing and subprime crisis. Does Bernanke have your confidence? Would you retain a Ben Bernanke as your Fed chairman?

Sen. McCAIN: Oh, I think I would. I--look, he's been in the job a very short period of time and so far I think he has performed well. I'd--I can't make, obviously, a final judgment on him, but everything I've seen, I think he's doing a very--an excellent job.

KUDLOW: Actress Whoopi Goldberg came out for total abolition of the death tax, sir. Do you agree with her?

Sen. McCAIN: I agree with her. I've always admired her enormously. Now my admiration is--knows no bounds.

KUDLOW: (Laughs)

A lot of people are calling for a corporate tax cut. Are you going to move towards a corporate tax cut? Heck, even the Western Europeans have lower corporate taxes than we do.

Sen. McCAIN: Sure. But I--but I really think we ought to have this on a philosophical basis, Larry, rather than, you know, pick out one or the other. But it keeps--it's in keeping with our overall thrust of what we need to do is eliminate the disincentives to savings and investment and to place incentives to savings investment--savings and investment. So certainly a corporate tax cut would be--would be part of that. But I think it's got a--we really need to look at this tax code and find out why it is that there's other countries in the world that are more, frankly, hospitable from an investment standpoint, because their of tax codes, than the United States of America is. That's not right.

KUDLOW: Just a couple others. Capital gains tax cut, dividend tax cut. You going to stay with those? Big popular things with investors.

Sen. McCAIN: Sure.

KUDLOW: You'll stay with them.

Sen. McCAIN: Oh, sure. Look, any increase in taxes is going to have an unsettling effect, and by not making the tax cuts permanent, you have the impact on every family, business and enterprise in America, that of a tax increase. That's just a fact. They have budgeted their futures based on the present tax--the present tax structure.

KUDLOW: Last ones. I noticed in the notes to your plan today you're going to ban Internet taxes and you want to ban cell phone taxes. I've not heard anybody on the campaign trail on those subjects yet. Can you elaborate?

Sen. McCAIN: Sure. The--frankly, state and local authorities are looking at the Internet as a--as a cash cow. They really are eager to get into that. We had moratoriums on the Internet tax and we have extended and extended it. Mine's been a little bit of this R&D tax credit, which we should have made permanent years ago. We kind of dangled the bait out there. We've got to make that permanent. This is--I don't have to tell you, insult your intelligence by reminding you, this Internet is the engine of America's economic future, and not only economy, but information and just about every other way. We can't cripple this. And this--and this is still a baby. It's going to have a lot of life associated with it before it's a mature technology.

And finally, on the cell phone, look, cell phones are universal now, the omnipresent, and I believe that we should not be taxing them. You might remember that we put a telephone tax on that we had for, what, 100 years that was a result of--was intended to pay for the cost associated with the Spanish-American War. You remember that?

KUDLOW: I do. I remember it well. I remember as a child reading about the Spanish-American War.

Let me ask you one last question.

Sen. McCAIN: Yes.

KUDLOW: Mr. McCain, what's your path for our nation?

Sen. McCAIN: I...

KUDLOW: What's your path to victory?

Sen. McCAIN: Well, I remember you volunteering for the Rough Riders and I appreciate it.

KUDLOW: (Laughs)

Sen. McCAIN: My path to victory is to--is to do very well here in New Hampshire. We really need to win and then that'll give us a bounce, and we are already traction in South Carolina. We're working hard in Iowa, but it's going to be very tough in Iowa, don't get me wrong. I got to give you straight talk. I think we can do better in Iowa. We're going to do--we need to win here. We need to win or--"win" is obviously the observations of the media. You know, a win can be most any place. And then South Carolina and then moving on to the other primaries, including the Michigan one, which I believe we can win before South Carolina. Look, we're drawing to an inside straight. I'm happy where we are, I cannot tell you, that at this time of a political campaign it's just a wonderful experience and you're so fortunate to be an American and involved in this kind of political process. Remember, Larry, I was the guy that stood fifth from the bottom of his class at the Naval Academy. If my old company officer were here, he'd say, `In America, anything is possible.'

KUDLOW: Senator John McCain, thanks for coming back, and all best on the campaign trail, sir.

Sen. McCAIN: Thank you, Larry.

KUDLOW: All right. That's wonderful--that's great stuff. That's great stuff. Thank you, sir. Be safe.

Sen. McCAIN: Thank you, my friend.

KUDLOW: Happy holidays.

Sen. McCAIN: Talk to you soon.

KUDLOW: Bye-bye.

Sen. McCAIN: Thank you. Same to you.




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