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CNBC TRANSCRIPT: CNBC’S LARRY KUDLOW SPEAKS WITH SEN. SHAHEEN AND SEN. COBURN TONIGHT ON CNBC

When: Tuesday, July 19, 2011

Where: CNBC’s “The Kudlow Report

Following is the unofficial transcript of a CNBC interview with Senator Jeanne Shaheen (D-NH) and Senator Tom Coburn (R-OK) tonight on “The Kudlow Report” (M-F, 7-8PM ET). All references must be source to CNBC.

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LARRY KUDLOW, host: So question is, will the revived Gang of Six debt talks really bring a bipartisan solution to stave off default? Here now we welcome to the show New Hampshire Democratic Senator Jeanne Shaheen, and we welcome back Oklahoma Republican Senator Tom Coburn. He's a member of the aforementioned Gang of Six. Some think he's the real ling--ring leader.

Senator Coburn, let me begin with you. Explain to us--before we get to the actual plan, which is very complex, how does this graphed on to the debt ceiling increase? Can you get it in time for August 2nd? Do you have to take a specific vote to raise the debt? How does this work, sir?

Senator TOM COBURN: Well, I--it'll be difficult for us to do it in that time. I think it can be done. It depends on if the leadership in the Senate and the leadership in the House gets behind this, or something similar to it. I think the breaking of the log jam says is that you can revenues that come through economic growth that would enhance the government's budget position. You know, there's all sorts of ways that you could do it. You could set a timeline and have a vote based on what the hard pay amount--payments are 500 billion right now and allow a debt increase that would go to that amount. And then if we've done the rest of the work by then, go on and allow it to go on and increase. Or you could say the whole thing is contingent on us doing this at some time in the future and there will be a limited amount of debt limit increase.

KUDLOW: Senator...

Sen. COBURN: So I think it's possible for it to happen, Larry. I don't know if it will, but I think it's certainly possible.

KUDLOW: Well, Senator Shaheen, I guess I ask you the same question. Is it possible? Because the clock is ticking, this evening is July 19th. August 2nd is the drop dead day. The whole world is watching, as you well know. And do you think legislatively this can get done? You've got the House, the House Republicans. I don't know what their view is on this, but it seems like this is kind of a Hail Mary pass, Senator Shaheen.

Senator JEANNE SHAHEEN: I--well, I think it's an important bipartisan framework to get a deal done that would address our long-term debt and deficits, and the fact is we have a two-part challenge. One is how we're going to deal with the debt and the deficits. And the second is what are we going to do to raise the debt ceiling so we don't have financial catastrophe.

And as Senator Coburn said, there are a number of different ways to do this, and hopefully we can get the leadership behind it and work it out so we can not just increase the debt ceiling and deal with the short-term concerns that we heard earlier from the businesswoman who talked, but we can actually put in place a long-term deficit reduction plan that will deal with this country's debt.

KUDLOW: Senator Shaheen, just let me ask a follow-up, are you OK with closing down the long-term health insurance plan, the so-called CLASS Act that was embodied in Obamacare's health act? Are you OK with that? Is that going to be a controversial point?

Sen. SHAHEEN: You know, I think there are going to be a number of pieces in any proposal that we can all agree to that individually we don't like. But I think the question is, are we going to be willing to put everything on the table--discretionary spending, defense spending, mandatory programs and revenues--and are we going to be willing to work out a bipartisan solution that's going to be in the best interest of this country? And that's what I'm interested in doing.

KUDLOW: Senator Coburn, a lot of people, as you can well imagine, are worried about 1 to $1 1/2 trillion in revenues. I know you're using the Bowles-Simpson marginal tax rate relief, but here's some of the issues that are being tweeted as we talk this evening. What's going to happen to 401(k)s? What's going to happen to IRAs? What's going to happen to capital gains? And is the AMT tax cut really real?

Sen. COBURN: The AMT tax cut would be completely eliminated. It's real. Nothing will happen to 401(k)s at all. There--there's no change on that. None of that is contemplated. The fact is there's plenty of room to grow this economy if you make really cuts in the rates. And we saw it during the Reagan--Larry, you know this. We have 4.9 percent average for four years of real economic growth when we did this same thing back in the '80s.

KUDLOW: How about--how about IRAs, Senator?

Sen. COBURN: Same thing.

KUDLOW: You're saying nothing will happen to 401(k)s.

Sen. COBURN: Nothing.

KUDLOW: Nothing will happen to IRAs. How about the capital gains tax, sir?

Sen. COBURN: The capital gains will resume under what is considered the law. It'll go back to 20 percent rather than be at the same rate--and the Bowles-Simpson, the capital gains was at the rate of what the new tax rates were. So we've actually made it better than what it was in the Bowles-Simpson, so it'll be at 20 percent.

KUDLOW: All right. That is better. Senator Shaheen, also on the revenue side, it's about 2-to-1, as I understand it, spending cuts to revenue increases. Will that pass muster on the Democratic side?

Sen. SHAHEEN: Well, again, I think the question is, do you want to put in place a long-term proposal that's going to produce almost $4 trillion in cost savings, which is what everybody who's looked at this in an objective way says we've got to do? And are you willing to put everything on the table to arrive at a compromise? And I think that's what the framework that this proposal that three Democrats and three Republicans have been working on for about seven months, have come up with. And I think there are a number of us who are ready to say this is an approach that we think we ought to be following. We need to raise the debt ceiling. That's critical to the finances of this country. It's critical to every family out there who's paying a mortgage or car payment or has a credit card bill, because we don't want their costs to go up. But we've also got to deal with the long-term challenge of the debt that this country is facing, and we've got to do it in a way that's going to be good for future growth in this economy. So I think we've got a framework here that will do that.

KUDLOW: Senator Coburn, can we talk about some of the spending cuts? I mean, I mentioned the CLASS Act from Obamacare getting taken out. OK. You've got a lack of detail, that's what I'm hearing from a lot of different people. You talk about a $500 billion down payment--I'm not sure what that means—four years of capping the budgets of the various departments and agencies--I'd like to hear you on that--and you defer Social Security. And I'm going to ask you if you're going to defer Medicare. And I guess the summary question, Senator Coburn is, is are these cuts real? Can they be relied upon?

Sen. COBURN: Well, I, Larry, I don't kid around very much. I think the cuts are real. There's 500 billion in health care mandatory cuts in this. Some of it will be used to pay--to respond to the SGR, the physician payment area. I think that you can count on the cuts being real. That caps are real. There's a new enforcement mechanism the Senate's never had. You have to actually pass a separate piece of legislation and it has to be passed with 67 votes to ever get around any of the caps. That's going to be highly unlikely. And you've got to do it for every one time. So if you want to violate the cap in one--more than one area, you got to pass another piece of legislation. So you have to have a real good reason for ever violating the caps.

KUDLOW: Senator, let me just...

Sen. COBURN: And that's been--that's been the problem in the past is...

KUDLOW: I don't mean to interrupt, but I just want to ask a— just a—what spending to GDP share would you have in this bill?

Sen. COBURN: What is the actual number?

KUDLOW: What are you targeting? As--are you targeting 25 percent...

Sen. COBURN: Well, well...

KUDLOW: ...20 percent...

Sen. COBURN: No, no, no, no, no.

KUDLOW: ...18 percent?

Sen. COBURN: Well, I--what I target is under 20 percent. That's the only way we can get healthy again. And that's why--I was going to say, based on your conversation with Senator Shaheen, this is a start. Everybody knows we have to start and that--we also know that $4 trillion doesn't solve all the problems, but it starts us down the way to send the confidence to the international financial community that we understand our problem and we're working on it there.

KUDLOW: All right. Well, you had a vote of confidence from the stock market today, no question about it. All right. It's great to see you, Senator Coburn. Ms. Shaheen, thank you for coming on. We hope you'll join us again...

Sen. SHAHEEN: Thank you.

KUDLOW: ...in the future.

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