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ERIN BURNETT OUTFRONT

Mitt Romney's Tax Returns; Interview with former Defense Secretary William Cohen; Cruise Ship Disaster

Aired January 24, 2012 - 19:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


ERIN BURNETT, HOST: Thanks, John.

Well Mitt Romney bowing to pressure and releasing his tax returns, it is a 500-page monster that covers the previous two years. We killed a lot of trees today. Did that reveal anything?

And then President Obama's re-election campaign officially starts tonight. We are counting down to the State of the Union.

And the death toll continues to climb from a cruise ship crash off the coast of Italy. We have new video of the search and rescue effort tonight of the divers. We're going to go there live tonight.

Let's go OUTFRONT.

Well, good evening, everyone. I'm Erin Burnett and OUTFRONT tonight crunching the numbers in Mitt Romney's tax returns. Here they are. We've got all kinds of flags in here, because I will admit I don't, as we said, I'm not sure anybody has ever read all 500 pages here, but this is two years' worth of Mitt Romney's tax returns released today.

The Romney campaign finally yielding to the growing pressure on the campaign trail. Well here is the breakdown. The presidential candidate earned $42.7 million in the last two years. He paid $6.2 million in taxes, an effective rate of just under 14 percent. Now the reason is that Romney made his money, pretty much all of it from investments which are taxed at 15 percent, but there is so much more in these 500 pages, which is by the way, I think we should just note for the record is longer that the book Romney wrote at 416.

We went through it all along with our OUTFRONT "Tax Strike Team", which we actually set up yesterday for this purpose, because we really did seriously want to go through this. An elite group of prominent tax experts, former IRS attorneys and tax professors -- you see them all here -- and they all responded to each specific question.

They say Mitt's tax return is actually kind of typical for a politician with his income. I didn't know there were any politicians with that income, but here is the point. We did see some red flags that are worth looking at.

First, carried interest, now we sounded the alarm on this last week and predicted that when we finally did see Romney's tax returns we'd see massive carried interest. All right, what's carried interest? That is when you invest other people's money, get a cut of the profit and pay the 15 percent capital gains rate. Check out our blog to see exactly how carried interest works.

Carried interest is how Mitt Romney made $12.9 million in two years. He paid 1.9 million in taxes on that. Had it been taxed at 35 percent, the regular income level, he would have owed more than double, $4.5 million. Now again, he paid the legal rate. The second issue for the OUTFRONT "Tax Strike Team", Romney's offshore accounts.

Now these are the funds in the Cayman Islands you may have heard about it, in Bermuda and also a Swiss bank account that he closed in 2010. Shady or not, "Strike Team" member and tax professor Dan Shaviro (ph) says maybe. Said quote, "I was surprised that he had so many offshore accounts that seemed to be producing very little taxable income. Why even bother with these investments?"

He seems to think there might be something else to it, well that's obviously still a question out there. The third point for our OUTFRONT "Tax Strike Team" was blind trusts. A lot of Mitt Romney's investments are housed in these trusts. And this is typical for politicians. What it means is that somebody else, not Romney, makes the decisions about where the money is invested.

And this allows politicians to avoid conflicts of interests. All right, there are no tax breaks associated with blind trusts, but back in 1994 when running against Teddy Kennedy for Senate Romney had this to say about Kennedy's blind trusts.

(BEGIN VIDEO CLIP)

MITT ROMNEY (R), PRESIDENTIAL CANDIDATE: The blind trust is an age-old ruse, if you will, which is to say you can always tell the blind trust what it can and cannot do. You give a blind trust rules.

(END VIDEO CLIP)

BURNETT: OK, yes, that might be a problem. But now our "Tax Strike Team" says from their analysis Romney has paid every tax dollar he owed and that is the bottom line. Stephen Moore, a senior economics writer for "The Wall Street Journal", John Avlon, a CNN contributor -- yes.

STEPHEN MOORE, SR. ECONOMICS WRITER, WSJ: Yes, the blind trust issue is a big problem (INAUDIBLE) no question about it, but you know you look at this 500-page document --

BURNETT: Yes.

MOORE: -- and what screams out to me, Erin, from this can we please have tax reform. Can we have simplicity in our tax system, and by the way, this 500 pages, the one thing I would -- as an addendum to what you said, don't forget the companies that Mitt Romney owns, because you are right, he gets most -- almost most of his income from investments from companies --

BURNETT: Right.

MOORE: Those companies also pay a lot of taxes. Their tax forms are probably four-feet high, and don't forget they pay a 35 percent rate. That is the only thing I object to about this discussion is that we leave out the fact that those companies paid a tax on the profit before someone like Mitt Romney or Warren Buffett got a penny of that money.

BURNETT: And let me ask you John Avlon, about one other thing in here, which I wanted -- I didn't highlight as we were talking, but I wanted to highlight with you, $7 million in charity in the past two years for Mitt and Ann Romney. That is 16 percent of the income. Just as a comparison someone like a Joe Biden gave one percent, and that's not to say what's the right amount to give. It's just to say by all accounts, they were very generous.

JOHN AVLON, CNN CONTRIBUTOR: They were and that's a very important point the make. This is an extraordinarily generous family. And again the point to make, everything they did is perfectly legal. But politics is perception, and the problem that Romney is going to run into whether it is now or if he gets the nomination in the general is that this kind of return could make him a symbol, not just a growing gap between rich and poor, but the growing gap between the super rich and the working wealthy.

BURNETT: Right.

AVLON: You know it's not socialistic to talk about this growing gap. It's got a lot of people very frustrated, especially in these economic periods, but the constructive response is exactly as Stephen said, we should be having a constructive debate about tax reform, simplification, a fair flatter tax system.

BURNETT: Right.

AVLON: Closing some loopholes like carried interests, because guess what, the only people who defend carried interests are people who benefit from carried interests, so let's begin (INAUDIBLE).

MOORE: And that's why probably, you know I'm for the lowest tax rates possible as you know --

BURNETT: Right.

MOORE: -- but I think it's hard to justify that lower rate for carried interests because as you said, you are not actually even gambling with your own money. You're gambling with someone else's money.

BURNETT: Right and you know and that's got to be the frustration for someone like you that, you know, he didn't do anything wrong, but just as a principle when we talk about tax policy in America, people are benefiting from that who all who benefit from that rate --

(CROSSTALK) BURNETT: -- are incredibly wealthy. It kind of gives a bad name to someone if you are trying to make an argument for dividends having a lower rate; it gives the whole concept a bad name.

MOORE: I really think the only political way out for Mitt Romney if he becomes the Republican candidate, and who knows at this point, but if he wins, look, Barack Obama tonight is going to talk about the Buffett rule, this idea that every you know rich people should have to pay at least a higher rate than middle income people -- and I think they probably already do, but the only way out for Mitt Romney is to say look, blow up the tax system, start over. Let's have a flat tax. You know you worked on that when you worked with Rudy Giuliani --

BURNETT: Right.

MOORE: I think there is a real populist you know support for that kind of idea.

BURNETT: But he could do and say I want to prevent this from happening and you know he can also John, I guess if he was using an argument, he could say look I paid more in charity over the past two years than I did in taxes.

AVLON: That's right, but also to argue against the self- interests. This would be a fascinating Nixon and China moment for him to come out against carried interest, say look, I've benefited from it, but I think given the deficits and debts we face as a nation, it does not make sense. That's a way to pivot on this politically, because I mean you know again the broader issue is that we are not talking about you know -- Democrats may try to paint him as Mr. one percent -- we're talking about Mr. 0.1 percent.

BURNETT: Right.

AVLON: Bloomberg had a fascinating analysis. The one percent threshold is $380,000 a year. He makes that in a week off this passive income.

(CROSSTALK)

AVLON: That's an extraordinary, just snapshot, so he's got to play offense to take the attention off of that.

MOORE: You know the one thing that really disturbs me, Erin, about the whole conversation about Bain Capital, his taxes, which has really been the whole discussion about the economy on the Republican side of the aisle is this idea that somehow someone who makes a lot of money they're demonizing wealth creation. And look Mitt Romney did create businesses. He did create jobs. There are thousands of Americans who benefited from his activities and if I were Mitt Romney I would say look I paid $3 million in taxes. That's a lot of money in taxes. He paid $30 million in taxes over the last 10 years. That's a pretty big tax bill on top of the fact that he gave at least that amount of money in charitable contributions.

(CROSSTALK) BURNETT: Put up the screen, because it makes the point of this carried interest broadly looking at his -- by the way, Newt Gingrich and Barack Obama are very wealthy guys as well, but you can look at their effective rates. Barack Obama $1.7 million in income last year and obviously a lot of that was book royalty, so it got the regular rate. He got some capital gains, but 26 percent. Newt Gingrich 31.6 percent, Mitt Romney 13.9, it is the perception.

AVLON: It is and it gets back to the idea of a flatter fairer tax system which will require closing some loopholes. You know we look at the impassioned debates we've been having about whether the Bush tax cuts (INAUDIBLE) sunset.

BURNETT: Right.

AVLON: Talking about 35 versus 39. For families, for households that have a $250,000 combined income and then all of a sudden you have this example of millions and millions and millions of dollars of passive income being taxed at 14 percent that rightly strikes some people as unfair and frustrating. The result though isn't just a demagogue you have to deal with it, to go --

BURNETT: Right.

AVLON: -- play offense with real proposals that can create that flatter fair tax system.

BURNETT: Interesting he could be a lot more aggressive, because he has got that plan out there now. If you make $200,000 or under as a couple, I will tax you zero on your capital gains, helping a lot of retirees and anything over that 15 percent. Barack Obama has his lowest rate -- with (INAUDIBLE) come in I believe somewhere around 20, so you know but he could go a lot further --

UNIDENTIFIED MALE: Here's what I worry about, Erin --

BURNETT: -- to be more progressive --

MOORE: As someone who has worked for tax reform for 25 years, because I do think our tax system is an albatross around the neck of this economy. We can do a lot better from a competitive standpoint. What is tax reform? It means you broaden the base. You get rid of those loopholes you were talking about and you keep the rates as low as possible --

BURNETT: And throw the IRS code in the toilet.

MOORE: That's for sure -- you -- and you bury it and you pour the salt on the soil so it doesn't grow back. I'm worried that we're talking about with tax reform is higher rates and I think that makes America less competitive in a global situation.

BURNETT: All right, well thanks very much to both of you. We appreciate it and everyone let us know what you think of course.

Well we've been OUTFRONT on the issue uncovering it for weeks; if you want to read more about the candidates' taxes go to our blog, CNN.com\OUTFRONT.

All right, well President Obama's State of the Union speech starts in less than two hours. We are going to get a preview of his message. Taxes are going to be a big part of it.

And three months after the death of Gadhafi and it looks like Libya's new government is losing control. Is it possible Gadhafi loyalists could be taking over again? Former Secretary of Defense William Cohen OUTFRONT.

And brand new video from the cruise ship. Did wealthy businessmen buy their way on to the lifeboats? We get the facts OUTFRONT next.

(COMMERCIAL BREAK)

BURNETT: Tonight, troubling signs that Libya's new government may be losing control. Three months since the death of Moammar Gadhafi, his supporters continue to fight for power, seizing a city from revolutionary forces. It was a deadly battle and it threatens to tear the country apart. It raises fresh doubts about the U.S. response to the conflict.

A lot of people thought that when Moammar Gadhafi was dead, everything was over and it was going to work fine, well it is not. We are OUTFRONT tonight with former Defense Secretary William Cohen, and Secretary Cohen good to see you again, sir.

WILLIAM COHEN, FORMER DEFENSE SECRETARY: Good to be with you.

BURNETT: I guess this outcome doesn't necessarily surprise you but you know people looking for a quick fix and he is gone and it's going to work and this is the largest oil reserves in Africa. They're not getting what they thought.

COHEN: Well, we tried to point out that once the euphoria dissipated and we knew that that would dissipate quite quickly then the hard part started. How do you put together a government that is inclusive? Libya happened to be the most clannish and tribal of all of the Arab countries. You have something like 140 tribes and clans in Libya.

A number of them were of course supported by Gadhafi's iron fisted rule. That's how he maintained control by using that iron fist to suppress and dissent (ph) in opposition. So now you have a country that has not enjoyed for the past half century any form of institutional government, and now putting the pieces together is going to take time. You are bound to have Gadhafi loyalists trying to seize power again. This is going to take time and we have to watch it very closely, work with the current government, and continue to have the international community involved and try to establish as much control as possible.

BURNETT: Obviously, the U.S. when it got involved and NATO you know the argument was humanitarian. But, there is the harsh reality that Libya is an oil supplier not as significant of one now as it will be, as I said, the largest oil reserves in Africa. Do you see a scenario where the U.S. military for that reason if things completely just fall apart here will be involved?

COHEN: I can't envision any circumstance that the United States would send its military in to try to control the oil supply. If it-- I mean there's an old African proverb that says you know when elephant fights, it is the grass that suffers. If the Libyan people continue to wage war against each other, the only ones who are going to suffer primarily will be the Libyans themselves.

That's their major source of revenue to feed the families (INAUDIBLE) it is not a tourist spot to begin with. So under these circumstances, the Libyan people have to understand that at some point they've got to reach some kind of reconciliation of the United States, NATO, the European Union, other countries, the Arab countries involved in the Gulf all have an interest in seeing Libya get through this period of time. It is going to be difficult. It's not going to be easy.

BURNETT: Yes. It should be a tourist destination. That was Gadhafi's thing was that it was going to be one of the largest tourist destinations in the Middle East and it should be. Gosh they've got some amazingly beautiful coasts and Roman ruins (ph).

COHEN: It should be, but as --

BURNETT: Yes.

COHEN: As long as there is conflict it's not going to be.

BURNETT: So what do you think happens though with the other question here, the chemical weapons reserves that some say Gadhafi had, international inspectors say that he had. The rocket-propelled grenades, all the -- the fact that safeguarding these stockpiles is so crucial that if they become somehow out on the market, there could be threats to the United States or to others. Does that force the U.S. to act?

COHEN: Well, we have known about Gadhafi having stockpiles and chemical weapons. When I was serving on the Senate Intelligence Committee way back in the 1980's, we followed very closely what Gadhafi was doing with his chemical weapons production. Since that time, Gadhafi himself had disclosed that he had chemical weapons, and so this doesn't come as a surprise.

The National Transitional Council also made disclosures that they have found chemical weapons, so the real issue now is what can the international community do along with the transitional government to make sure that that mustard gas and sulfur don't get loose and into the general community or into the hands of terrorists. So maintaining control over that is going to be important. I think the international community is working very closely to make sure it doesn't get into the hands of terrorist groups.

BURNETT: Secretary Cohen, thank you very much. We appreciate it. COHEN: Good to be with you.

BURNETT: The death toll continues to climb in the Italian cruise ship disaster. Earlier today deep sea divers recovered a 16th victim from the capsized Costa Concordia. Sixteen people are still missing including an American couple. Authorities released new images today of the search and rescue effort.

You can see the diver there, more video also surfacing of the evacuation from that night when the ship ran aground. Now this comes amid reports that prosecutors are looking into allegations that a few wealthy Russians bought their way on to lifeboats ahead of women and children. Dan Rivers has been covering the story in Italy from the beginning, and he has the latest for us and Dan good to see you.

A lot of Americans have seen in the newspaper today stories that people on the ship saying that wealthy Russians were literally giving cash to the lifeboat operators and getting on before children and women. Do you have any sense as to whether that happened?

DAN RIVERS, CNN INTERNATIONAL CORRESPONDENT: Well, I mean, it is certainly a great piece of copy, Erin. It has been picked up by the "Huffington Post", by "The Wall Street Journal", both credible titles. If you read carefully they're quoting the German media and they appear to be absolutely quoting a German tabloid "The Bilt" (ph) newspaper, which is quoting one woman on the island who said she saw Russian men, women, well-dressed coming off before women and children and that seems to have given a rise to this kind of story that perhaps these well-dressed Russian men and women bought their way off first.

We've got no other credible sourcing on this at all. There is some suggestion that Italian prosecutors have got testimony from passengers aboard who are corroborating this. No one else we have spoken to has confirmed this. The prosecutors are not talking to it either.

BURNETT: Let me ask you about the search and rescue mission, it started again. I know you were covering that. A woman was recovered. Do you know any sense as to how much longer they're going to keep looking and whether they think that anyone might still be alive?

RIVERS: They are saying that they can carry on doing both, salvage and search and rescue, at the same time now. Realistically, I think there is no chance now of finding anyone else alive. This is now a search for bodies, sadly. The search underwater has been hampered by movements of the ship. They have got very sensitive equipment now trained on the ship checking how much it is moving, and they seem confident it is safe to get the divers in again, so that's been continuing.

BURNETT: Well Dan Rivers thank you very much, reporting from Italy tonight. All right, it's called the Buffett Rule and President Obama says it will require the wealthy to pay more taxes. How will it play in tonight's State of the Union?

And nine films nominated for best picture going into this year's Oscars, but that is just one of the numbers that matter tonight.

(COMMERCIAL BREAK)

BURNETT: Besides the election, there's another contest going on right now. The Oscar nominations were announced today during this morning's telecast. The movie "Hugo" received 11 nominations, the most of any film. But eight other films also received enough number one votes to become best picture contenders. And in addition to the prestige that comes with the nomination, it also means big bucks for the lucky films, which brings us to tonight's number, 20.3 million.

That's how much more money on average the best picture winners earn after they were nominated for the Academy Award between 2006 and 2010. The numbers were crunched by a research firm called Ibis World (ph). The best picture -- best Oscar picture winner won a 22 percent increase in box office revenue after it was nominated. When we looked at last year's numbers, the box office bump was pretty obvious. All of the movies that were still in theaters when last year's nominations were announced had significant box office increases on the day they were nominated.

Now people are fickle. The numbers didn't really always hold into the weekend. But lesser know films like "127 Hours" and "Winter's Bone" -- "Winter's Bone" really benefited from the added attention. I might have to check it out, a year late. However, actually winning the award doesn't seem to help. The big winner last year, "The King's Speech" saw box office revenues drop 60 percent the day after it won the Oscar. Maybe it went into DVD or online or who knows, but it is an honor apparently just to be nominated.

All right well speaking of numbers, Apple, big, big, big numbers today, a record number of iPads and iPhones. We've got that and more on the "OutFront 5" and 90 minutes away from the State of the Union. So what is the president going to talk about? This is going to be a crucial speech for his re-election. The president's communications boss comes OUTFRONT to tell you first.

(COMMERCIAL BREAK)

BURNETT: We start the second half of our show with stories we care about where we focus on our own reporting, do the work and find the "OutFront 5". Number one, Mitt's taxes, Romney's returns were released today giving us a glimpse into one of the wealthiest men to run for president. He made $47.2 million in 2009 and 2010, effective tax rate about 14 percent. OUTFRONT commissioned a "Strike Team" of seven tax experts to read through the 500 pages. They note that three-fourths of Americans pay that rate or less. But they also say Mr. Romney will need to disclose more about his blind trusts.

Number two, an Idaho man charged with trying to assassinate President Obama pleaded not guilty today. One of our producers in the courtroom told us Oscar Ortega Hernandez didn't say a word, but nodded and smiled at the judge. He is accused of firing an assault rifle and hitting the outside of the White House. No one was hurt, but court documents claimed that Ortega Hernandez referred to President Obama as the devil and the anti-Christ. Number three, the world's new airport hub -- a record 51 million people traveled through Dubai International Airport last year. One analyst tells us that if Dubai continues to grow with the same rate this year, it will be the world's number two airport, just behind London Heathrow, which is number one. And that's why it's called the Middle East.

Number four: Apple crushed earnings estimates, bringing $46 billion, $7 billion more than anyone expected. I mean, it is hard, everyone, to explain the scope of beating estimates by that magnitude. That's pretty incredible.

Apple's first quarter of 2012, the best in the history for the company, it says it sold a record 37 million iPhones and 15 million iPads. That's the first full quarter of the company has operated without Steve Jobs.

Well, it has been 172 days since America lost its top credit rating, and what are we doing to get it back?

Well, the International Monetary Fund is warning that if the problems in Europe get worse, it send the U.S. back into a recession. And the IMF cut its global growth forecast to 3.3 percent, kept its forecast for the U.S. at 1.8 percent.

That's not great, but it is not a negative number, and the difference between a 1.8 and negative number in terms of jobs is hundreds and hundreds and hundreds of thousands.

All right. We are getting a preview tonight of President Obama's State of the Union address. It begins in just over an hour from now. The president will be calling for an economy where he says everyone will play by the same set of rules.

He also issues a warning to his opponent saying, quote, "I intend to fight obstruction with action."

Make no mistake: this is the beginning of his campaign season.

Coming OUTFRONT tonight, White House communications director Dan Pfeiffer.

Dan, good to see you.

DAN PFEIFFER, WHITE HOUSE COMMUNICATIONS DIRECTOR: Good to see you, Erin.

BURNETT: All right. You got a big night, and I want to get to the politics of this, because I know it is important. But first, I wanted to ask you about policy. Is the president going to come forth with a specific new proposal about anything in terms of policies that he wants to put in front of Congress tonight?

PFEIFFER: Yes. New proposals and a whole host of areas. He'll have new proposals to call for new era of American manufacturing, so that we're creating jobs here, encouraging what we referred to as in- sourcing and discouraging out-sourcing. He'll talk about how to give skills and education to American workers and how to make sure that every Americans paying their fair share when it comes to how we pay taxes in this country.

So, there is a whole host of new policies. It's really a specific blueprint for what we refer to as America built to last.

BURNETT: All right. Let me -- go ahead. Go ahead.

PFEIFFER: Well, basically what the president is going to talk about is a make or break moment for the middle-class. And he's going to -- you saw in the speech in Kansas last month where he talked about make sure everyone had a fair shot, everyone playing by the same set of rules. You're going to see tonight exactly how we get that done.

BURNETT: All right. Let me ask you about the end, obviously, I was assuming taxes will come up since I know Warren Buffett's secretary is going to be in the audience?

So, what specifically or what can you tell us about this? Is there going to be a specific rate that you're going to propose for wealthy Americans or what?

PFEIFFER: Well, I will leave a lot of the details to the president tonight, and it's never a good idea to get in front of your boss on the State of the Union night.

BURNETT: Fair point.

PFEIFFER: I want to be able to be here next year doing the same thing.

I think what you will hear more details on what we refer to as the Buffett Rule, which ensures that millionaires don't pay a lower effective tax rate than the middle-class. He'll offer some very specific details on what that will look like tonight.

BURNETT: What do you think about the fact that on the capital gains and dividends, which is a big part, Dan, of obviously the issue of the Buffett Rule, that Mitt Romney would let couples making under $200,000 pay zero percent? The president's plan, at least as I've seen it, would not. Is that something that he'd consider, do you think?

PFEIFFER: Well, I think -- I'm not going to get into the details right now, but I think there is a bigger issue here, which is, is everyone going to pay their fair share? And the question is, are we going to ask millionaires and billionaires to pay their fair share? And is it -- is it the right thing to do for middle-class Americans to pay a lower effective tax rate where people make millions of dollars?

The president doesn't think so, and I don't think the American people think so. So, he will talk about that tonight. And as I said, you'll hear some specifics on the Buffett Rule.

BURNETT: All right. Let me ask you about something that the Senate Majority Leader Mitch McConnell said today. He was pretty clear on what he said President Obama will do tonight.

Here's what he said.

(BEGIN VIDEO CLIP)

SEN. MITCH MCCONNELL (R-TX), MINORITY LEADER: The goal isn't to conquer the nation's problem, it's to conquer Republicans. The goal isn't to prevent gridlock, but to guarantee it.

(END VIDEO CLIP)

BURNETT: The president obviously blames or McConnell blames the president for what everyone agrees is a broken Washington, broken Congress. Will he respond to that charge tonight?

PFEIFFER: Well, I'd say two things. First, I encourage Senator McConnell and everyone to hear what the president has to say. He'll make it clear that the best thing for the country is for the Democrats and the Republicans to come together to do some common sense things that will help create jobs, grow the country and help the middle- class.

I think it's worth noting the irony in Senator McConnell's statement since Senator McConnell declared only a few years ago that his number one priority was not creating jobs, not helping the middle class, not spurring growth, but defeating President Obama.

So I think we've tried to work with the Republicans. We're going to continue to try to do that. And our hope is that they'll be, finally in this year, will be a willing partner with the president.

BURNETT: The president -- I know you keep talking about the politics of the middle-class, and building a middle-class. The Republicans called that talk the politics of envy, about trying to take from those who have.

How does the president avoid being seen as inciting class warfare?

PFEIFFER: Well, I think he will address that directly tonight. This isn't about envy, this is about math. The question is -- no one is -- thinks that the wealthy should pay their fair share because we're jealous of their success and somehow the middle-class is just jealous of millionaires. That's not what this is about.

This is ensuring that we do what we need to do as a country, that we pay down our deficit and we don't deal with our deficits and fund our governments by eliminating Medicare, by cutting education, by cutting clean energy. The things that the middle-class needs to thrive. That's a question. It's a math question.

BURNETT: All right. Well, thank you very much, Dan Pfeiffer. Appreciate it. I know you got a busy night ahead.

PFEIFFER: Thank you, Erin.

BURNETT: John Avlon is back with me now.

And I want to talk about the whole Congress side of this and Congress not doing anything. But, first, I want to just ask one point, because I think it's all going to come down to this politically. How do you define the word fair?

JOHN AVLON, CNN CONTRIBUTOR: That is an important question.

BURNETT: Because there's an implicit thing that it is unfair in that. How do you get around this, whether you're a Democrat or Republican?

AVLON: Well, the administration is putting a lot of cosmetic (ph) importance on this phrase "fair share". You heard it over and over and over again.

And you're right, it is open to debate, because they need to make a case of what they want to do really is to get rid of cheating. They want to close loopholes. They want a fairer and flatter tax system, simplification.

BURNETT: Right.

AVLON: But if it smacks class warfare, people quit listening. And the whole key is they got the president to put forward a vision for what a functioning, not just campaign season, but a second term could look like. He can't just run against Congress. He has to propose solutions to the problems that caused such gridlock and hyper- partisanship.

BURNETT: Let's talk about that with Congress, the, quote, "do- nothing Congress," which is what he said and God knows that the American people seem to agree, whether it's doing nothing or not doing what they like. The bottom line is the approval of the rating in our polls is 11 percent.

AVLON: Right.

BURNETT: What can he do here to, I mean, Congress is an easy target.

AVLON: Yes, it is. And this is the old Harry Truman 1948 playbook, run against the do-nothing Congress. The thing is it's not sufficient, right? The president -- when he campaigned in 2008 promised to be the person who could bridge our divides and he's been able to do so and you can argue that that's because of obstructionism from House Republicans or you can argue that the tone was set incorrectly from to get-go when the Democrats had unified control of Washington.

BURNETT: Right.

AVLON: But to simply run against that will be to admit failures. So, the president has got (AUDIO BREAK). Whoever is going to be here one year from today, whether it's Republican or me, the problems are going to exist unless we seal the endemic problems. That's why I'm in favor forward to address agenda of congressional reform. Take on filibuster reform, ending secret holds, up or down votes.

BURNETT: Right.

AVLON: The things that allow the tyranny in the minority and raise that bar and end up empowering hyper-partisanship and you need to get to the heart of this. And that's going to be a challenge for the president, not just to position himself as a defender of the middle class. Because you don't tear people down in trying to strengthen the middle class, of course. But also to get to the heart of the gridlock and the hyper-partisanship.

BURNETT: Can he be seen as the champion of the middle-class? It's a big challenge when you have people like Jeb Hensarling saying this.

(BEGIN VIDEO CLIP)

REP. JEB HENSARLING (R), TEXAS: The president's policies have failed. That's why he's resorting to the politics of division and envy.

REP. JOHN BOEHNER (R-OH), SPEAKER OF THE HOUSE: His policies have failed, and as a matter of fact his policies have made the economy worse. The politics of envy and the politics of dividing our country is not what America is all about.

(END VIDEO CLIP)

BURNETT: Division and envy. They have their talking points coordinated.

AVLON: Yes, those are talking points. So let's immediately take that major discount.

The president can make a case that the economy is better than it was three years ago and he needs to take talking points at what they are, cynical political tactic, and say, look, let's define the common ground that exists and then build on it on any given issue. People playing politics, that's what prebuttals are for. That's a cynical divisive move.

BURNETT: All right. Thank you very much, John Avlon. We appreciate it, and fair point.

And, of course, the State of the Union begins soon.

Now, let's check in with Anderson Cooper who is going to be counting us down into the State of the Union.

Hey, Anderson.

ANDERSON COOPER, CNN ANCHOR: Hey, Erin.

Yes, we're going to be live obviously from 8:00 to the State of the Union and then again after the State of the Union, all the way until midnight as we cover the State of the Union address and the Republican response. A lot of people say that the president is going to use the opportunity basically it's his first big campaign address of 2012, they say it will attempt to frame his campaign message with a goal of shifting the focus off the economy, instead put a negative spin of what life would be like for Americans with the Republicans in the White House.

We got a panel of experts to sift through the president speech, as well as the GOP response.

We'll also be speaking with the Tea Party Republican Senator Jim DeMint, as well as White House senior adviser David Plouffe.

And later, our Tom Foreman is going to give us a snapshot in how Main Street America is receiving the speech. He'll be watching with a group of undecided Republicans, Democrats, and independents will be able to show their approval or disapproval through that dial testing

A lot ahead at the top of the hour, Erin.

BURNETT: All right, Anderson, looking forward to that. I love the whole dial testing. We've been doing on this election coverage. Fascinating.

Well, the countdown to the president's State of the Union is on. Wolf Blitzer is also coming OUTFRONT with his preview of the speech.

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BURNETT: It's the most coveted seat in Washington, D.C. tonight -- a prime spot next to the first lady as the president delivers his State of the Union address. Now, the seats next to Michelle Obama also tell us everything about the president's political strategy.

One of the guests tonight is Warren Buffett's secretary, Debbie Bosanek. Bosanek is going to get a special mention from the president as he speaks about what he sees is tax inequality and the so-called Buffett Rule.

The president is determined to get wealthier Americans to pay higher taxes after the billionaire investor said he was paying a lower tax rate than his secretary.

OUTFRONT tonight, Nancy Pfotenhauer and James Carville.

Great to see you both.

Nancy, let me start with you. The reason Warren Buffett's secretary there, obviously, they are the highlight, because he gets his income from capital gains and dividends. He pays theoretically about 15 percent, like Mitt Romney and unclear exactly what his tax bracket will be, but 33 or 35 percent statutory, perhaps, very different from effective.

But do you make of that? That's a big difference.

NANCY PFOTENHAUER, FMR. SPOKEPERSON FOR JOHN MCCAIN FOR PRESIDENT: Well, it's a big difference, but it's also a little bit of an illusion, because what Warren Buffett pays and what Mitt Romney pays does -- what you hear quoted does not reflect the 35 percent that's already taxed through the corporate tax rate.

So, their income tax rate on top of that is a double taxation of those dollars earned, and that's not what is being expressed. That's why when you look at the data, the top 1 percent pay 40 percent of the income tax revenue even though they earn only 20 percent of that money.

BURNETT: James Carville, but more than half of Americans agree that the capital gains and dividends should be taxed at the same rate as ordinary income. It's an issue that now obviously is front and center. But Nancy raises a fair point, which is it is true, as she says, the top 1 percent pay as she's saying 40 percent.

JAMES CARVILLE, CNN CONTRIBUTOR: Because the income has gone up, you know, by about 450 percent, where ordinary people's income has gone up 20 percent. But, look, you know, one thing that we can say is that Newt Gingrich and Mitt Romney both agree that Mitt Romney's taxes are too high. They think that 39.5 percent is too high. They want to cut it more than that and they think that the Social Security checks are too high, so they want to cut them.

So if you think that a cut in Social Security, and a cut in Mitt Romney's taxes, they want to deliver on both of those. And that's a fact.

PFOTENHAUER: The end goal here is economic growth and job creation, right? We should have zero capital gains tax rate, if we want to create jobs in this country. The last thing you want to do is penalize savings and investment. If you tax something more, you get less. That's what creates economic growth.

CARVILLE: I have to say, Bill Clinton raised tax rates, he created 22 million jobs. George Bush cut the taxes on rich people and created 1 million jobs. Are we really still arguing this? I mean, I can't believe people get on straight-faced on television and argue that somehow giving Mitt Romney a tax cut on his money in Switzerland is going to create jobs in America.

PFOTENHAUER: James, we are talking about tax reform that would theoretically give much more people tax cuts. But it would clean the code, get rid of the special preferences, make it transparent. Actually, I haven't seen Mitt Romney embrace that yet. I would feel a lot better about him if he did. I think that's what needs to be done.

CARVILLE: You think that Mitt Romney pays too much in tax, and I don't think he pays enough.

PFOTENHAUER: I don't think -- James, you are not acknowledging the 35 percent effective tax rate that occurs that is the corporate tax rate. He pays the 15 percent, on top of the 35 percent.

(CROSSTALK)

PFOTENHAUSER: I'm sorry?

CARVILLE: Would you like me to address that question. Let me say that few companies pay 35 percent, and let me also say that you conservatives always say, if you raise the corporate tax rate, they're just going to pass it off to the customer. So, now, you want to come back and argue they never passed it off to the customers. They only pass it off to the shareholders.

The whole argument, frankly, I have a lot of respect for you, but the whole argument falls apart. American corporations compared to other 30 countries don't pay that high when it actually comes to the tax they pay is not overly high, and they do pass a lot off to the customers. It doesn't go just to the shareholders.

BURNETT: All fair points, it is higher than a lot of countries even with the effective rate, but it is a lot lower than 35, and you right on that.

But, James, can I just throw one question out to you because I'm curious how you'd interpret this. From the plans that we have right now, in this issue of capital gains and dividends, which is important for wealthy people and retired people, Mitt Romney, if you as a couple make under $200,000, would tax you zero. So, your rate will go down from the current 15 to zero. You wouldn't pay tax at all. And then you tax everyone else at 15 percent.

The president would increase the rate from 15 for the lowest, for everybody, to 20, and then as high as 25 percent.

So -- whose plan is more progressive?

CARVILLE: You know, I have to go ahead and do the sort of calculation, but if you look at what the president is overall proposing, it's a more progressive plan.

The point is that the wealthy in the country have seen almost exclusively all of the income gains, yet their taxes have gone down in the last 10 years. It utterly makes no sense to me, but, you know, it's a real simple thing, if you think that 13 percent for Mitt Romney, 13.9 is too much, vote Republican. If you think he is not paying enough, vote Democrat. That's all I can tell you.

BURNETT: And, Nancy, James has a fair issue on this, right? So, you know, if people buy your argument, you still come out to the point where and I think you can tell Mitt Romney felt uncomfortable about this the other night when he was having that back and forth in the NBC debate with Newt Gingrich. It just feels a little off for the rate to be that low for someone so wealth, doesn't it? Just psychologically and intellectually?

PFOTENHAUER: Intellectually, I can tell you right now, it's about your effective tax rate. And when you're talking about capital gains, when you're talking about taxing dividend income, you were talking double taxation. If you add on the death tax, it's the government's third bite at the apple. That does not make sense. The Buffet Rule or derivation thereof has been applied in California and look what a dismal failure it's been there. Why on earth would we apply it on the national level when he's lost a million public sector jobs on his watch, that's Obama. And it has an unemployment rate of 8.5 percent. It makes no sense whatsoever.

So, it's good bumper sticker politics. It's lousy policy.

BURNETT: Final word, James.

CARVILLE: Yes, you're right. Poor Mitt. You know, Mitt, you're paying too much at 13.9 and Nancy and all the Republicans want to come in and take you down to zero. So, maybe you won't have to pay any taxes, Mitt. That would have been great.

Let's have a nice country. Let's have a wonderful country.

BURNETT: You know, James, I have a little talk with that last night. You said Mitt Romney wins if he's president and wins if Newt Gingrich becomes president because Newt would actually put him at zero.

CARVILLE: Right. Put him at zero, yes.

BURNETT: Did, to be fair, did he say he did not think it was appropriate by his tone. But, still, winner either way.

CARVILLE: What a guy, huh?

BURNETT: Power or money, you get one or the other. Thanks to both. Appreciate it.

PFOTENHAUER: Thank you.

BURNETT: All right. And we are just about an hour away from the president's State of the Union address.

Wolf Blitzer has covered, I don't know, a couple of these before, Wolf, at least?

WOLF BLITZER, CNN ANCHOR: A few.

BURNETT: Yes, just a few.

Wolf is with us tonight.

And, Wolf, because you have been covering these for years and years and years, what do you think the president needs to do tonight?

BLITZER: He needs to convince the American public the country is moving in the right direction.

I suspect he's not going to say the state of the union is strong or state of the union is good or anything like that, but he'll suggest it's getting better, it's getting stronger. That there has been job creation, there has been an improvement in the private sector. I think he's going to tout some of the achievements over the past three years.

My sense is there's frustration over at the White House that they haven't done necessarily a great job communicating to the American public what they have achieved, and they let the dialogue, if you will, be manipulated by their opponents. And as a result, they've got a lot of work to do to convince the American public that things are actually moving in the right direction.

Pollsters always ask, as you know, Erin, that question -- is the country moving in the right direction or wrong direction? And if most Americans think the country is moving in the wrong direction, that the incumbent's going to lose. He's got to convince the American public that the country right now is moving in the right direction.

BURNETT: Yes, it's a tough line, Wolf. You know, I know we've been talking about the economy, right, and the job market. Well, over the past year, the president can say unemployment was somewhere around 9.5 percent, now it's down to 8.5 percent. That's an improvement.

But he can hardly tout that given 8.5 percent is unacceptably high and you have so many people who are in jobs that they don't want to be in. They want better jobs. It's very hard to take credit for the economic improvement, isn't it?

BLITZER: He's not going to say the economy is good. He's not going to say that 8.5 percent unemployment rate nationally is good. He's going to say it's bad and there's still an enormous amount of work to do.

What he will suggest is that he's got a plan to make it better to see things improve. The Republicans would just go back to the economic policies that he says caused this near depression, this great recession and he's going to make that case strongly not only today, but in the days, the three days that follow, he's going to several battleground states to start making his point -- Arizona, Colorado, he's going to be in Michigan. It's not by accident these states that are going to be critical if he's going to be re-elected.

So, what we're going to hear from the president tonight is basically he outlines of his campaign themes that he's going to be speaking a lot about over the next several months.

BURNETT: Wolf, I just want to ask you because some of the fun things. You know, you always look in this. I know there's been questions, you know, sitting mixed, Democrats and Republicans, and we're waiting to see who's going to get the aisle seat, you know, when he walks through.

And so, what can you tell us about some of those more fun items?

BLITZER: Well, I know there are some members of the House who literally staked out an aisle seat as early as 8:00 this morning. Eliot Engel of New York, Democrat of New York, he's been there all day. He wants to be the first to greet the president as he's introduced when the sergeant-at-arms says, Mr. Speaker, the president of the United States. He wants to be there. He wants to be seen on television and few others.

So, there's always a handful, a dozen members who come really, really early to stake out a good aisle seat to get themselves on television.

BURNETT: I mean, it's like -- well, it's not quite like the lines to get a new iPad or something, but I guess it's more in that direction.

BLITZER: If it makes you happy, it's a good thing. I've spoken to Congressman Engel about this and it's a tradition he has. He does it every year. He loves doing it.

And I guess that's -- if you want to spend all day blocking out a seat, that's fine.

BURNETT: That's right. If you've got that kind of dedication, then you deserved the seat.

Well, is there anyone from the cabinet that won't be there tonight?

BLITZER: Yes. But they haven't announced who that person is, supposedly for security reasons. I suspect fairly soon, we'll see what -- we'll see who that one cabinet member who will literally be in charge of that nuclear football, God forbid if anything were to happen, I'm up on Capitol Hill myself right now, there has to be someone who would have the continuity in government, if you will. I have spoken with other cabinet members who have that responsibility.

And they take it very seriously. During the Clinton administration, I remember speaking to Dan Glickman, who is the secretary of agriculture. He had that responsibility. One day they said, don't go to Capitol Hill, you're in charge of that nuclear football. And you know, they walked him through all the contingencies if something were to happen.

So, they take it very seriously. But I don't know which cabinet member yet is going to have that responsibility tonight.

BURNETT: Very interesting. A lot of people may not have realized that. I mean, is there a different place every time that person waits or a certain protective place that they just wait?

BLITZER: You know, I better not say. I think I know where they hang out during the -- let's say, three hours or so, that they're here.

BURNETT: All right. Well, yes, I guess it's appropriate that you wouldn't say.

All right. But, pretty interesting. I think a lot of people may not have realized that or interpreted it in that way. All right. Thanks so much, Wolf.

BLITZER: Thanks, Erin. BURNETT: And Wolf will be back in a moment. We'll be back tomorrow at 7:00. Special coverage of the president's State of the Union address is next.

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