Larry Kudlow Speaks with Charles Rangel, Chairman of the Ways and Means Committee in the U.S. House of Representatives, on "Kudlow & Company" (Transcript Included)

WHEN: Thursday, October 25 at 7:00PM ET
WHERE: "Kudlow & Company"

The following is the unofficial transcript of a CNBC interview with Charles Rangel, Chairman of the Ways and Means Committee in the U.S. House of Representatives, on CNBC's "Kudlow & Company". All references must be sourced to CNBC.

In the interview with CNBC's Larry Kudlow, Rep. Charles Rangel discusses his proposed U.S. tax overhaul, among other topics.

LARRY KUDLOW, host: Ways & Means Chairman Charles Rangel, thank you for coming back on KUDLOW & COMPANY, sir.

Representative CHARLES RANGEL: Always good to be with you.

KUDLOW: All right, Mr. Rangel, why don't you give me the key bullets for the mother of all tax reform.

Rep. RANGEL: Well, I know that so many people are saying, `There they go again, raising taxes.' As it turns out, our tax bill actually reduces taxes for 90 million people. The main thrust, of course, was to remove this tremendous tax burden, something like $800 billion, off of those people that the tax was never intended to what you commonly refer to as those affected by the alternative minimum tax. But while we were at it and recognizing that there was so many loopholes that were in the tax code, we wanted to simplify the code, we wanted to encourage investment, and we wanted to make certain that there was a degree of fairness and equity involved. And so what we have done is we closed up the differences in how you treat those that manage equity funds, the difference between those who would like to believe it's capital gains and get taxed at a low 15 percent, as opposed to do the very same thing and they're taxed at a much higher rate of ordinary income of 35 percent. Once we started closing up these loopholes, we found that we could provide relief for some 70 million people. How do we do it? Well, we take into consideration the fact that everyone is talking about more people working, but they don't talk about that they're working longer or the increased cost for health or child care or housing and education. And these are people who are not on the top ranks of our rate, it's people that are caught right in the middle. So the first thing we do is increase the standard deduction. And of course, everyone knows this determines how liable you're going to be, if at all, for any income tax. Then we start dealing with those people who work every day but still, at the end of the day, they end up working below the poverty line. Rather than have them discouraged and stopping to work, we have what is called the Earned Income Tax Credit, and that means that we give an incentive, we get them a check to keep these people working, and we're very proud of that. We...

KUDLOW: But this stuff is, correct me if I'm wrong, but just I have not read the committee print yet, but this stuff will be, quote, "paid for," end quote, with a significant increase in the top tax rates, if I have this right, a 4 percent surtax that rises to what, 4.5 or 4.6 percent, sliding up from 200,000 for families married filing jointly up through 500. So you're going to raise taxes on the upper end to finance the lower taxes, is that right?

Rep. RANGEL: Well, no, that will be included. There is no question that even at the upper end, those people below 400,000, the removal of the AMT burden would be a dramatic reduction in their taxes. And it is true that we will be raising funds by closing loopholes that are in the tax code. What we don't exclude, as you pointed out, those people that are above $400,000, and there would be a surtax there. But when you consider less than a million people on the top and 90 million that would be receiving relief and the fact that we don't, unlike the President Reagan tax cuts, we pay for this. We don't borrow the money. It is paid for, and so, therefore, it is not really a revenue raiser, and it's not a tax raiser.

KUDLOW: Well, of course, I'm one of money who hoped this would be a sort of Reagan-Roth-Kemp tax cuts, 1986 tax reform moment, and I want to get to the corporate tax improvements in a second. Your ranking Republican on Ways & Means, Mr. McCrery, put out a release today. He says the 4 percent surtax will raise the income tax over the next couple of years to 44 percent, as he calculates that, and a lot of people have speculated that we'd wind up with a 44 percent capital gains tax rate. Can you comment on Mr. McCrery's criticisms?

Rep. RANGEL: No, he hasn't shared this with me. We unveiled the bill before the committee yesterday, and I just left him on the floor, which I have to return. But let me make it abundantly clear, this bill will not be getting a vote for it this year. We want this vote, this bill to get out there to be exposed. We expect to vote early spring of next year and besides that, we now have to deal with the extenders because the AMT and so many other tax provisions expires this year, so we have to work with the House and Senate in order to do this. But, in the final analysis, we really don't do anything with corporate tax--with capital gains. And corporate taxes we reduce from 35 percent to 30.5 percent. A lot of this with encouragement of secretary treasurer, who proved to us that we were not being competitive with other countries that have much lower corporate taxes. But we pay for that by making certain we close the loopholes there that have caused some corporations not to pay any taxes at all, notwithstanding the rate.

KUDLOW: Well, I like the corporate tax reform very much. I'll get to that in a minute, but let me just finish off on the--on the surtax or the possibility of a surtax, if not this year, in the out years, some are saying the biggest impact is going to be on small businesses, roughly 10 million filers for subchapter S LLC and so forth. Just the back of the envelope, Sir, that means instead of taking home 65 cents of every dollar earned, people would only take home 56 cents at the higher 44 percent rate. That's a 14 percent rollback of the incentive for those who have been the most successful and, in terms of small businesses, a big job creating machine, when as you know, the economy is really softening. How do you respond to that worry?

Rep. RANGEL: Well, that worry hasn't been shown to us. We've had hearings on this bill. We have not heard the negative type of reporting that you've given. But that's one of the wonderful reasons why I put the bill out there, and we would like to be able to prove to people that we want to stimulate the economy and we want to encourage people to invest. And we believe, like the president does, that people know best what to do with their money. I don't think the president meant just wealthy people.

KUDLOW: Well, of course, punishing the successful earners, we could debate the ideology of that. I, myself, think the supply side model works, but let me move on to the corporate side. You would drop the top corporate rate from 35 to 30.5 percent. That would really help our competitiveness. What's the outlook for that? What do you think?

Rep. RANGEL: Well, it's very difficult for me to see what's going to happen in the Senate. That's why we had to move swiftly to make certain that those provisions of the existing code that expire this year, that we take care of it. A lot of things on the Senate side are done by bipartisan agreement. As you know, that kind of excludes the thinking of the constitutional Ways & Means Committee where we're supposed to do it. So what we really want to do is to see what their response is going to be because, I have to tell you, among the Democrats, and many, many Republicans, we are getting support. At the end of the day, we have to see, you know, it's out there to see what happens. But I'm amazed at the broad-based support that we're getting.

KUDLOW: Part of this also would have large corporations that do a lot of business overseas, a lot of times they leave income overseas because if they bring it home, it gets double taxed. They'll be taxed overseas, they get taxed again here. I think that you would penalize them further in your bill. I mean, shouldn't we just go to one territorial tax rate instead of allowing double taxation around the world?

Rep. RANGEL: No, what we would do, really, is to encourage them to bring--make--bring the investments here by not taxing it here and making certain that the investments overseas are not treated favorably. The idea that we have is that we want to encourage people to invest in the United States and have a tax system that's more friendly to that rather than one that encourages the investment to remain overseas without having a taxable event.

KUDLOW: But aren't they taxed overseas? I mean, they have to pay that tax in the country in which the business is domiciled. So if you're going to force them back home, don't you mean you're going to double tax them?

Rep. RANGEL: No, we're not forcing them back home. We want to make it very attractive for them to have the same type of alternative and not to be encouraged through the tax system to invest overseas. We want to make certain that we make it comfortable for them and profitable for them to invest right here in the United States where we need the investment and we need the job creation.

KUDLOW: On taxing the so-called carried interest for private equity and hedge funds and venture capital and so forth, let me just read you the Private Equity Council put out a release today. They say leading European countries, including~ the United Kingdom, France, Ireland and Spain, they all tax carried interest as a capital gain. By heading in the other direction, your proposal would put US firms at a competitive disadvantage. Your response.

Rep. RANGEL: Larry, I don't know what the Europeans and other foreign countries are doing. We didn't look at this in being competition with other countries. What we did look at was fairness and equity. If people in the course of managing funds are investing capital in these funds, then whatever profit comes out of this will be treated as capital gains. So no matter what other countries are doing, we have to have a tax code that is perceived as being fair. And therefore, if people are doing the same managerial services over funds and one calls itself a carrying interest and the other is just receiving ordinary income, the difference between the 15 and the 35 percent cannot be described as being the right thing to do. So all we're doing is say you do the same job, you get the same enumeration at the same tax rate. If you're doing something differently, that allows you to look at this as a capital investment, it will be treated that way.

KUDLOW: What happens, Sir, now with the AMT? A lot of people say you're going to break this piece off. There is a debate about whether PAYGO rules in the Senate will apply or in the House, which means you've got to find, what, $50 or $60 billion? How's that going to work and what's the timing? Isn't the clock really ticking now on the AMT?

Rep. RANGEL: The clock is ticking. We have given assurances to the secretary treasurer and Internal Revenue that we will be taking care of this because they have to prepare the necessary papers if there was going to be a change. It is a very serious problem as the difference between the House and the Senate. I had hoped that we would send a paid-for extenders which would include the AMT over to the Senate until I heard that both the Democrats and Republicans are considering not paying for the alternative minimum tax. And once again, we would be borrowing money in order to bring tax relief. We have worked very hard in the House of Representatives to bring tax relief without borrowing money to do it. And I think it was Chairman Greenspan who said that even the Bush tax cuts were not paid for, and he would not support us that if he did not think it was not going to be accompanied by a cuts in programs. So there will be a difference between the House and Senate. We're meeting with Senator Baucus and with Senator Grassley because they are trying to get some bipartisan agreement. But if they don't intend to pay for it, and we in the House have appeared to take the political heat, then they can certainly abide by PAYGO, that we don't borrow the money and we don't cut into other programs, there will be a difference between the House and the Senate.

KUDLOW: Well, I think spending restraint is really, really important aspect of a pro-growth policy. Let me ask you, we have seen, since the 2003 tax cuts, a nice expansion of the economy. I think total tax collections have gone up about $750 billion. The deficit has come down to, what, 1 percent of GDP. My question is, right now, there are jitters on Wall Street and jitters on Main Street. This housing recession is getting under everybody's skin. Credit is tighter. I'm sure you hear a lot of that as you travel around and back home in New York. What do you say to people who sort of say, `Well, shouldn't we be cutting taxes across the board to stimulate the economy, rather than raising taxes in some parts of the economy?'

Rep. RANGEL: Well, I would say that we are cutting taxes for 90 million Americans and that even when it comes to the alternative minimum tax, we're not going to borrow money. I don't see how any economist can say borrowing money and not paying for the removal or the elimination of AMT, I don't see how that stimulates the economy. It would not surprise me that the more money you borrow and put into the economy, it might stimulate it, but the price for doing that will be paid by our children and our grandchildren.

KUDLOW: Charlie Rangel, I'm just going to thank you for your time. I know you're busy. This is a heck of a period for you. We look forward to covering this story as it unfolds. Again, Mr. Chairman, thank you very much.

Rep. RANGEL: Thank you. See you soon.

KUDLOW: Thank you, Sir, I appreciate it.

Rep. RANGEL: See you soon, Larry.

KUDLOW: All right.

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