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RUSH: Scott in Boston, you’re next on the EIB Network, sir. Great to have you with us.

CALLER: Hey, Rush, amnesty depression dittos from Boston here. So I’m hoping you can give me a pick-me-up. I’m really worried about this whole thing, and I’m wondering if you can tell me anything that makes me think I don’t have to pack up my home and move because La Raza is going to move into it.

RUSH: Pardon me, I just lit a cigar here, and I’m on the verge of hiccups. I’m trying to avoid the hiccups. Well, I don’t think it’s realistic to pack up your home for La Raza to move in and leave it and so forth. Here’s all I can tell you. I will admit to you that it looks bad because none of this makes any sense. The impression we all get is that representative republicanism doesn’t work. Not democracy, because democracy clearly is not what’s functioning here, but elected representative republicanism is not working. There’s absolutely no response to the majority of Americans on this, and so it creates, ‘What is this all about?’ It’s the fundamental backbone of our society, many people believe, the functioning of the country. But the point is the battle is not over, and the war is not over. Even if this thing passes the Senate, Nancy Pelosi is going to need 60 to 70 Republican votes in the House, and over there, these people are going to be far more attuned and sensitive to the complaints of constituents because they’re all up for reelection every two years, meaning just a little bit more than a year from now.

CALLER: Yeah.

RUSH: Some people think the fix is already in, and if it passes the Senate, it passes the House automatically and it’s going to happen.

CALLER: I’m at a real disadvantage because I work in Boston, and you know who my senators are here, and I live in Maine, and my two senators in Maine are completely ignoring all my phone calls and faxes and everything to kill this thing. So it’s not a good feeling.

RUSH: No, and a lot of people are in the same circumstance you are. Nobody’s senator is responding. Well, very few senators are responding to their constituents. That’s what a lot of people are looking at here as the breakdown.

CALLER: Well, thanks for what you do, Rush, please keep hitting it.

RUSH: I’m going to answer this a little further. We’re going to go to a profit center time-out, but I’m going to answer this a little further because I don’t want to you to be forlorn and hopeless out there because it’s not necessary.

BREAK TRANSCRIPT

RUSH: Now, this question comes up periodically from people: ‘How do you stay optimistic?’ or, ‘Tell me things are not totally lost.’ You know, it’s difficult in a situation like this to not sound Pollyannaish. I want to try to avoid that because I understand, and I join you in recognizing the absolute seriousness that this particular piece of legislation poses. But it’s not just this piece of legislation that poses great problems. Folks, I don’t know if you notice all the other things that are happening out there. The left, the Democrats and the left in this country have gotten so confident, that they are not holding back who they really are. Ever since that election last November, they are opening up and they are telling everybody in this country who they are and what they want to do. Have you noticed the stock market plunge that started last week? It went down 185 points in one day. You know what coincided with that? An attack on the capital gains tax rate — and I’m telling you, the people of Wall Street, I don’t care whether they’re Republicans or Democrats, they understand that the Democrat Party is going to launch an attack on capital formation. Now, you have right now the top marginal income tax rate’s 35%. The capital gains rate is 15%. So there’s a differential there of 20%.

If you don’t think that that capital gains rate of 15% has not been an absolute boom, when you hear about all the unexamined money flowing into the treasury every month, with all these stories about tax receipts higher than ever, deficit coming down, cap gains is it, 15%. Many people are invested in the markets and income on assets, equities and so forth is taxed at 15%. It’s not concerned earned income — and it’s not just the rich. If you’re a member of the California teachers or personal employees union out there, your fund, your pension is invested in these instruments. All of your municipalities and the fire departments, everybody’s pension is invested in one degree of asset equity or some other, and the gains that are made there are taxed at 15%. One of the reasons why is because it’s a high-risk thing. It’s much riskier than taking a job and getting a guaranteed amount of money paid to you every week, two weeks, month, whatever, and so there’s a risk-reward system. Now, during the nineties, the top marginal rate, if you added it all up during the Clinton years was 40%, and the capital gains rate was 20% — and Robert Rubin was the secretary of the treasury back then, and Rubin is one of the guys leading the call for raising the capital gains rate to something. What does he want it up to, 25 or 30%? I think they want it to be the same as earned income.

The Democrats made that point last week, and you saw what happened on Wall Street. It’s not just this immigration bill. They are taking aim at capitalism. They are taking aim at individual liberty. They are taking aim at freedom. They are taking aim at prosperity. They have a visceral disgust with the way this country is structured, the institutions and traditions. Larry Kudlow wrote a piece today in National Review Online, and he really spelled it out. He said, look, the Democrats have a war on winners. The Democrats have a war on life’s winners, or as Dick Gephardt used to say, ‘the winners of life’s lottery.’ It’s just an accident that some people do better than others. So there’s all kinds of things that Democrats are aim at here. They want to tear down existing structures and rebuild the country in their own image, which leans left and socialist and so forth because they want power. They want control. You say, ‘Well, Rush, why would they want to reduce the amount of revenue coming into the treasury by doubling the capital gains tax rate?’ They’ll go out and borrow money! They’ll blow the deficit sky high. The bigger that government gets and the more taxation they need to fund it, all these illegals that are going to put a great strain on the social safety system that we’ve built up in this country for the genuinely needy — in fact, it’s another thing. We keep hearing that there are jobs Americans won’t do.

Well, you know how to get rid of that? End welfare! Make everybody on welfare go to work, and there will be jobs that Americans will do and we won’t need these low-income arrivals from all over the world who have no education. Just stop welfare and there will be all kinds of jobs Americans will do. But when you’ve got the federal government paying a bunch of people millions — 51% of us now receive a government check of some kind for some reason — well, that leads to control. When you’ve got a number of people who really don’t have to work to get by — we’re not talking about prosper here, but to subsist, and subsisting in America is not bad compared to subsisting in a place like I saw in Afghanistan. When you’ve got that many people that are dependent on the government or looking to the government, that’s power for the people that run the government, and that’s what the Democrats want to do. In the process, they want to get rid of any possibility that conservatism or the Republican Party would pose them a serious electoral challenge down the road. So there’s more than just this immigration thing. The immigration thing is part of it. The frustrating thing about that is, that the Republicans are going on along in their own demise. Unbelievably, shockingly, they’re going along with it, for whatever reason. It’s inexplicable. So how does this all relate to the guy who called from Boston who wanted to buck up? I don’t want to be dramatic here, but we really are in a war for the survivability of the kind of country we’ve always had, and want to have in the future.

I’m not saying the country is going to be destroyed. I don’t want to get overly descriptive or dramatic here. America is going to be America, and there are always going to be people who will surpass these obstacles and get by, and they’re always going to be hated, and they’re always going to be targeted as winners by the left. But there’s a lot to fight out there. If you believe in it, I know it’s easy to give up and get depressed and maybe if you have the money move behind some gate and, you know, let other people worry about it while you try to enjoy life. You can do both at the same time. This is something that’s going to have to be dealt with in a serious fashion, an ongoing effort, and this immigration bill, let’s say cloture is defeated tomorrow. Go ahead and exhale, but wake up Friday morning and understand the Democrats are going to come right back with some other measure. These people are focused; they are relentless; they are without scruples on what they’re attempting to do, and they’re going to keep working, now that they won those elections. So the ’08 elections are going to be pivotal, and the Republicans are not doing anything to help themselves. Now, people always ask me, ‘Rush, why would rich Democrats vote to raise taxes on themselves?’ This is always a very good question, and I love providing the answer.

This term, ‘tax the rich,’ and ‘the rich aren’t pay their fair share of taxes,’ is so loaded and such a misnomer. The people who have genuine wealth in this country, who do not work and have earned income — earned income is when you make a wage. Capital gains are when you have taken the money you’ve earned after taxes that you’ve earned and you invest it, in an equity or a stock or what have you. Any gain, any appreciation is only taxed at 15%. The truly wealthy in this country never pay these tax increases. The truly wealthy in this country have pretty good portfolios, and they’re diversified in their investments. Some are in municipal bonds, some are in equities, some are in hedge funds. They’re all over the place. But they’re not paying 39%. And if the rich tax rate gets raised to 42%, they’re not going to pay that. Now, if the capital gains rate goes up, they will pay that. The capital gains rate, 25%, that would be a disaster in terms of capital formation in the markets, but at the end of the day those people would still be paying far, far less in taxes than the, quote, unquote, rich, defined now by Barack Obama and Democrats as those of you who make a family of four $200,000 or $250,000 a year. It’s such a loaded question, and it’s all based on class envy, and the people that you think, that the Democrats make you think are going to really get soaked, never get soaked because there’s no tax on wealth, until you die, and then we have the inheritance tax and the estate tax. While you’re alive, whatever wealth you’ve accumulated that you have socked away, there’s no tax on that — other than the capital gains that you might make.

If some of your investments go south, by the way, and you don’t get compensated for that when you lose. You just lose, and that’s why the capital gains rate has traditionally been much lower. It’s interesting. Kudlow points out in this piece that Bob Rubin, when he was treasury secretary for Clinton, is out there leading the charge today to get the capital gains rate raised. He’s one of the liberal Democrats trying to do this. Yet, during the Clinton years, the top marginal rate, 39 or 40%, cap gains was 20%. It’s the same 20% differential that there exists today except it’s 35-15 today under Bush — and, of course, Bob Rubin is clearly eager to point out how great an economic boom we had in the 1990s with this differential of 20% from earned income rates to capital gains. Now all of a sudden with the same differential, 35% income tax rate at the top and 15% capital gain, that’s not good! We’ve gotta raise the capital gains rate — and he’s got his, by the way. He is a multimillionaire. Whatever tax policy that the Democrats enact is not going to impact him at all, and if he wants to have no impact from it, he can take as much money out of his equity portfolio and put it over in municipal bonds, and if you go out and buy municipal bonds, you can buy municipal bonds these days are throwing off maybe four or five percent tax-free! There’s no tax on the income generated by municipal bonds. I’ll just give you the numbers here. I give a caller these numbers once. I learned this, when I saw how Ross Perot was invested. The vast majority of Ross Perot’s money — and he’s a billionaire — it’s in munis!

I said, ‘What is this?’ So I went out and talked to people. I had some numbers run for me: $25 million in municipal bonds will throw off, tax-free, $2 million a year. Whatever income tax rate goes up, it’s not going to affect anybody who has municipal bonds. That’s fixed income, essentially. They’re going to throw off the same amount of money as it was intended when you bought it. It doesn’t change much. It is what it is when you buy it and it’s not something that grows. You have to keep adding to it if you want it to throw off $2 million a year or more. Just run the numbers down. You don’t have to have $25 million. If you want a hundred thousand dollars tax-free, the municipal bond way will insulate you from whatever tax increases these people come up with. But what’s horrendous about this is that the Democrats and the liberals are trying to make everything one of you think that the people they’re really soaking are the Warren Buffetts. There’s a story Warren Buffett is joining with the Clinton campaign, and he’s all upset about tax rates, too, because he made $46 million last year, and his tax rate, he says, was lower than his secretary who makes $60,000.

Well, in the first place, what a tightwad to pay a secretary $60,000! Number two: Warren Buffett probably paid a lower tax rate because a lot of his income, of course, comes from his investments. He’s getting cap gains income. Berkshire Hathaway. He might pay himself a salary of a hundred thousand dollars, take the rest of it in cap gains. There are all kinds of things that you can do. Of course, his secretary is going to pay a higher tax rate. She’s being taxed at somewhere in the twenties, and he’s being taxed at 15%. But 15% of his 46 million is still going to be higher than whatever her percentage is of her $60,000. But the Democrats say, ‘Yeah, but look at how much he’s left with and how little she’s left with,’ and of course that causes another spat. Look, the point of all this is you have to stay engaged, and you are engaged on this immigration bill like you haven’t ever been engaged, and there is far more down the road that you’re going to have remain engaged in. It’s going to be challenging to figure out who to vote for in 2008 because your own party is letting you down and giving you no reason to support them, but on the other side it’s not just this immigration bill that will eventually down the road lead to the total restructuring of our society and culture. The Democrat Party will do that the same damn thing!

BREAK TRANSCRIPT

RUSH: If all the rest of what I told you is not bad enough, the Democrat Party is trying to secure our defeat in the war on terror. They are trying to empty Club Gitmo, where incidentally I, a man running the country — and you know it and I know it — have a thriving merchandise business at Club Gitmo, and they’re trying to shut that down and bring those prisoners of war here to give them access to the US court system. You can forget about anything ever happening to them then when their ACLU and John Edwards-type trial lawyers get hold of them. Trying to secure defeat in Iraq. They’re trying to makes us impotent in the rest of the world. Now you got Senator Leahy, the Judiciary Committee chairman in the Senate, issuing seven subpoenas also to the justice department, a couple other places, Dick Cheney, over the ‘warrantless wiretap program,’ which has already to have helped save off terrorist attacks last summer in London! You know, I have not been around throughout the entire history of this country, nobody has, so it’s always hard for us to not think, ‘It can’t be any worse than it is today,’ but these battles for control of the country, ideological battles, intra-party partisanship and skirmishes, they’ve been going on forever.

For those who are citizens that are engaged and care about this, for all the reasons you care about it — you care about it for your kids; you care about it because you love the country; you care about the future; you want people born in this country a hundred years from now to have a better life than you have. So you care about this stuff, and it’s a never-ending battle. It’s never going to end, unless the Democrats succeed in eliminating as a viable opposition party, either the conservative movement or the Republican Party. But even at that, even if that happens, somewhere down road, there will be a revival. Parties in power always end up screwing up. It took Democrats 40 years to screw up their control of the House, but they did. The situation during the Civil War in this country probably had this country more roiled than we are today. But, that’s history, and that wasn’t us. Today is us, and the things that we’re going through, the things that we’re threatened by are very real, and I don’t mean to diminish them by trying to compare them to things in the past. I’m just saying there’s reason here to not throw in the towel. You’re the backbone of this country. You are the ones that make the country work, not these schlubs in Washington that get elected. They’re the ones that get in the way of it. They’re the ones that have to be overcome — their laws, their regulations — they’re the ones that put obstacles in our way that have to be overcome, and we always manage to do that. This business out in Tahoe, this fire, this destruction out there is so unnecessary, but we’re living among a bunch of liberals who won’t let us cut down dead trees, for crying out loud, and so people’s property is destroyed. The liberals in charge of this are blaming people for living there, or global warming or some such stuff. Look, it’s frustrating to you and me alike. But they can be beaten because they have been in the past.

END TRANSCRIPT


Headline: Washington’s ‘War Against Winners’
Subheadline: A cap-gains assault on private partnerships would strike a dagger into the heart of U.S. capital formation.
Byline: Larry Kudlow
Date: June 27, 2007, 7:45 a.m.
Source: National Review Online

Last Friday’s precipitous stock-market plunge, with the Dow Jones dropping 185 points, is all about Washington’s continued war on prosperity.

The latest assault comes courtesy of House Democrat Sander Levin. Late last week, he introduced a bill that essentially would abolish the 15 percent capital-gains tax preference for risk investing, and raise it by 20 percentage points to the 35 percent corporate and personal rate. This goes beyond an earlier tax attack on a public offering by the Blackstone Group, and would slam into all private partnerships, including buyout funds, hedge funds, venture-capital firms, real estate partnerships, and oil-and-gas deals.

Incidentally, while attacking capital gains, the congressional Democrats are killing initiatives for across-the-board cuts on wasteful appropriation bills. According to the Club for Growth, House Democrats defeated separate measures that would cut spending by 4 percent, 1 percent, and 0.5 percent.

Does this mean the Democrats favor tax hikes over real spending control? It appears so.

Washington economist Kevin Hassett says this is part of the Democrats’ “war against winners,” and he’s right on the money. In particular, these willy-nilly changes of the tax rules would have a chilling effect on capital formation, and could constitute the biggest attack on capital since the 1930s.

As mentioned, the lightning rod in this tax-hike endeavor was the Blackstone Group, the private-equity giant that went public last week. Blackstone’s investment-fund profits are taxed at the 15 percent cap-gains rate, and since these profits come from high-risk investments, that’s how it should be. But Democrats in Congress view these profits as plain income, and greedily want a higher take.

But plain ol’ income this is not. The recent crack up of two Bear Stearns sub-prime-mortgage hedge funds shows just how risky these ventures can be.

Yes, there’s big money to be made when these private partnerships click. But the economy at large also is a beneficiary. Private buyout funds often save highly troubled companies from bankruptcy. They insert skilled managers who streamline operations and make businesses more efficient, a process that can ultimately lead to greater profits and business expansion. You know a lot of these companies: Chrysler, Staples, Sears, Domino’s, Dunkin’ Donuts, Toys“R”Us, Clear Channel Communications, Hospital Corporation of America. All of these firms were brought back from the dead thanks to private partnerships.

Nobody knows for sure whether Congress will green-light the Democrats’ anti-growth agenda. The hope is that President Bush will veto any tax hike that lands on his desk. But the mere threat that Congress would embark on such a program of wealth destruction and economic impoverishment — all in the name of taxing “rich people” — has investors reeling.

Ironically, a lot of today’s anti-cap-gains momentum is the handiwork of former Clinton Treasury secretary Robert Rubin. He actually believes a low cap-gains tax has no economic growth impact at all. However, back when Clinton and Rubin were running things, the personal income-tax rate was lifted from 31 to 40 percent, while the cap-gains tax was reduced from 28 to 20 percent, making for a 20 percentage point tax advantage for cap-gains over regular income. Flashing forward, the current Bush administration lowered the income-tax rate to 35 percent and the cap-gains rate to 15 percent, preserving that 20 percent differential.

Hmm . . . Is Rubin saying the cap-gains tax advantage was good for the Clinton boom, but not the Bush boom?

Truth is, that differential provides a strong incentive for entrepreneurial risk taking and higher-risk, cutting-edge investment — both of which lend real torque to the economy.

Another unfortunate irony is that while Democrats think they’re striking out at the rich, they’re actually jeopardizing the retirement portfolios of millions of middle-income Americans. Firemen, police officers, and teachers, to name a few, are all represented by the big state and city pension funds. And these funds are heavily invested in the hedge and private-equity funds that the Democratic tax machine is targeting. Is this fact lost on the Democrats? And don’t they realize that two out of every three voters in recent elections owned stocks — either directly or indirectly? Are they attempting to commit political suicide?

If the Democrats get their way, job creation will be adversely affected, too. Clearly, you can’t create new jobs in the private sector unless there’s a new or expanding business to create those jobs. And since new and expanding businesses require capital for investment funding, if you tax that capital more, you get less investment and fewer jobs.

In short, you can’t have capitalism without capital. The process works for “rich people” and the middle class.

Whenever Democrats wage war against the rich, the middle class becomes the collateral damage. This may be the law of unintended consequences, but it is something this Congress fails to understand.

— Larry Kudlow, NRO’s Economics Editor, is host of CNBC’s Kudlow & Company and author of the daily web blog, Kudlow’s Money Politic$.

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