SYNOPSIS: The second half of this interview is cut off from this version of the transcript, so it is incomplete. If anyone has the rest of the transcript, please email me.

CAFFERTY: The jobs report came out on Friday. Unemployment up to 6 percent. Another 48,000 jobs lost and, of course, the economy, most experts would agree, cost President Bush's father his shot at re-election back after Operation Desert Storm. Moving ahead, with Congress divided on the details, President Bush's proposed tax cut has been squeezed from $726 billion to $550 billion to a top figure being espoused by many in the Senate of no more than $350 billion. The president claims the tax cuts will give the economy a much needed boost and lead to the creation of $1.4 million jobs, if he gets everything he wants, but the Democrats and the Federal Reserve, Alan Greenspan in particular, think the tax cuts might actually hurt the economy. The president's pitch comes as he prepares campaign for a second term. For a closer look at particulars of the president's plan, we are joined in Washington, by CNN's White House correspondent Dana Bash. Dana, welcome.

DANA BASH, CNN WHITE HOUSE CORRESPONDENT: Hi, Jack. Well, thanks for having me. You know, this is a critical time for the president's economic package because it's next week that the House tax writing committee and the Senate tax writing committee will actually start to do their work, and despite the fact that Republicans are in control of both houses of Congress, it is, as you mentioned, going to be a very uphill -- an uphill battle for the president to get what he wants. Now, let's go after what the president proposed back in January. First of all, he proposed a $726 billion plan. And some of the highlights are accelerating the 2001 tax cuts, eliminating full -- fully eliminating -- taxes on dividends, tax breaks for businesses who purchase new equipment, and new training accounts for the unemployed. Now, what the White House says, their claim is that the way to help the economy is to focus on businesses, that is the way to create new jobs. This is how they think it will help. It is, as you mentioned, 1.4 million new jobs. That's what they say their package will produce. An average of $1,083 for each American in terms a tax cut, and $1,384 in tax cuts for 13 million elderly Americans. Some of the -- part of the pitch here for that dividend that tax cut is that it helps elderly Americans. That's what they say at the White House, because that they feel they get most of the benefit from stocks that yield dividends. Now, knowing Congress is not going to give him his full plan, the president, a couple of weeks ago, did lower the bar. He said he's not -- no longer even going to try for a $726 billion over 10 years, he's just going to try for the $550 billion figure. The House is going for that. The House is saying, OK, that is the number we are going for, but the details, the White House found out late this past week, are very different -- or a little bit different from what the White House wanted. And it was a little bit of a blow to the folks here at the White House, particularly in the centerpiece of White House plan, and that is, the dividend elimination. The House Ways and Means Committee, backed by the Republican leadership, is going for instead a full elimination simply a drop. A dramatic drop, but only a drop in the dividend taxes, and they're going to match that with a cut in the capital gains rate. That is something that the White House doesn't even want in the first place. They didn't have it in their plan.

CAFFERTY: Dana, thanks a lot. The president's tax proposal, I suppose, is like a pizza with anchovies, you either like it or you don't. So, I bring in a couple of guests now. We are going to have a mini-debate over these weighty issues. "New York Times" op-ed columnist Paul Krugman joins us from Princeton, New Jersey. Mr. Krugman says the president's plan would actually destroy jobs. Here in New York, Bear Stearns chief economist, John Ryding. He says Paul Krugman might need to double check his map. Gentlemen, welcome. Mr. Krugman, take us out on this. You don't think that the tax cuts the president wants are going to create any jobs. Why not?

PAUL KRUGMAN, COLUMNIST, "THE NEW YORK TIMES": Because the direct effect is very small. Very little of this tax cut arrives in the hands of people who are likely to spend it. Very little of it arises in the next year or two when we actually might need some job creation. And in order to sell the tax cut, the administration is shortchanging the things that might actually create jobs. And most spectacularly, it's refusing to provide any aid to state and local governments, which are cutting back sharply. So, if you look at the overall impact, this is a disastrous proposal.

CAFFERTY: John Ryding, it sounds like Mr. Krugman has a point. State and local governments are hurting big time, and there is precious little on the way of federal help on the way. Nevertheless you think the tax cuts are a good idea and might be just the prescription the economy needs. How so?

JOHN RYDING, BEAR STEARNS: Well, I think they are the prescription for a number of reasons. Firstly, I don't think it's a bad thing when you allow people who earn money to keep more of their own money. Small-business owners pay high tax rates. This will lower the tax rate of what small-business owners pay and send them to create more jobs on. On the issue of no stimulus now, the equity market would respond quite positively to the elimination of the double taxation of dividends. That would boost consumer wealth, and that would boost GDP through consumers' spending a percentage of that wealth. And thirdly, on the issue of government spending, if you actually look at what's projected to happen in the budget, government spending rises quite rapidly over the next six years in the president's budget at more than twice the rate of inflation, some 5 percent per year with big increases in Medicare and Medicaid spending. So, quite frankly, I don't buy into the argument that the budget and the tax cut is short changing anybody, either on government spend or on tax stimulus.

LISOVICZ: Gentleman, Susan Lisovicz here. Can we just talk about a federal deficit. Does anybody care that this could get completely out of control? That it would call for higher federal debt payments, at the same time reduced savings. Doesn't that matter ultimately? Well, I think first all, you have to remember where we are. We have a government debt to GDP ratio of about one-third. Back in 1995, it was around one-half. We have paid down a substantial amount of debt, and there's no problem if we run up some debt over the next few years in an attempt to get...

KRUGMAN: But, this is a permanent tax cut. Can I just say this? That's whole point. This is not a temporary stimulative tax cut. It's a permanent tax cut. It's intended -- it does very little for the economy now. It provides -- it saps revenue into the indefinite future. We are heading for the problem of the retiring baby boomers. No, this is crazy. This is a tax cut that is being sold as exactly what it is not. It is, in fact, an attempt to starve the government of revenues later on when it needs them.

SERWER: Andy Serwer from "Fortune." How are you doing? I want to ask you about incentivizing or stimulating state and local governments. I mean, isn't the whole point here to stimulate the private sector? I mean, jobs come from businesses, not government, right?

KRUGMAN: No, jobs come from both. And look, what are we looking at right now are severe cutbacks in essential services at the state and local level. If you were talking about, you know -- if we were talking about something that would actually lead it an expansion of what state and local governments do, would actually lead them to take on new responsibilities, create new programs, then we could have a discussion. But what's actually happening right now is we are cutting schools, firing teachers. We're cutting, you know, we're cutting road maintenance. We're cutting health care for the poor, especially for poor children. All we are talking about now in the realm of the political discussion is whether the federal government should provide some aid to avoid the necessity of state governments doing that. By the way, state governments are also now starting to raise taxes because they have no money. So, we have this bizarre situation in which people who receive lots of dividend income that isn't already tax sheltered, which basically means rich people, are getting a tax break at the same time that states are raising state taxes and closing schools and reducing health care for poor children. That's pretty amazing.

CAFFERTY: What about -- Mr. Krugman, what about the elderly, who oftentimes rely on the few dollars they get in stock dividends to support Social Security?

KRUGMAN: That's a wonderful thing. The administration likes to say most of this tax break will go to the elderly, and it's true. Most multimillionaires are elderly. It turns out, however...

CAFFERTY: Wait.

KRUGMAN: ... 70 percent of older Americans receive no taxable dividend income. OK? It turns out that among elderly Americans with incomes of less than $50,000 a year, a grand total of 4 percent of this will go to them.

CAFFERTY: Paul, what percentage of the entire population receives taxable dividend income?

KRUGMAN: It's certainly well under half. The bulk of this goes to people at the top. Remember, most people who have stocks have them in 401(k)s, which are already tax sheltered. So, this a tax break that only goes to people who have large amounts of dividend income, not into a 401(k).

CAFFERTY: John, what about that point? I mean, Bill Gates of Microsoft went out and declared a stock dividend within nanoseconds of the president uttering the phrase, "Let's kill tax on dividends." Because he could make $80 -- $90 million a year extra based on his stock ownership. I man, does Mr. Krugman have a good point here?

RYDING: No. I think we have to bear a number of points. First, dividends are extremely overtaxed. It takes $2.50 of pretaxed profits to pay $1 of dividends after...

Originally broadcast, 2.21.03