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The Situation Room

'News of the World' Scandal Reaches U.S. Shores; Obama's Record Breaking Campaign Haul

Aired July 13, 2011 - 18:00   ET

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

WOLF BLITZER, CNN ANCHOR: Happening now, Rupert Murdoch's media empire under threat. A multibillion dollar deal is scrapped as the British tabloid hacking scandal spreads possibly soon to the United States.

Also, he's a Washington power player who can instill fear in Republican lawmakers who violate his anti-tax orthodoxy. We're going to talk about that, the debt ceiling, much more with Grover Norquist. He's here.

And a CNN exclusive, Christians worshipping in secret and in fear as the Chinese government crackdown intensifies. We'll take you inside an illegal underground church.

We want to welcome our viewers in the United States and around the world. Breaking news. Political headlines. And Jeanne Moos all straight ahead.

I'm Wolf Blitzer. You're in "The Situation Room."

There's fresh fallout today from the hacking scandal that brought down one of Britain's biggest newspapers, the Prime Minister David Cameron has announced the public inquiry into eavesdropping and bribery by journalists working for media mogul Rupert Murdoch. Amid the public fury, Murdoch's News Corporation has now dropped its $12 billion bid to take control of British Sky Broadcasting.

And the scandal that could spread beyond Britain. Three, repeat, three U.S. senators now urging the Justice Department to investigate Murdoch's U.S. holdings.

CNN's Brian Todd is working this part of the story for us. It's a dramatic development, Brian. What do we know?

BRIAN TODD, CNN CORRESPONDENT: Well, Senator Jay Rockefeller is leading this charge. He thinks journalists from Rupert Murdoch's papers may have targeted Americans for phone hacking that those actions may have been criminal in nature and they even might have involved victims of September 11th.

So as of now, Mr. Murdoch is under intense pressure on both sides of the Atlantic.

(BEGIN VIDEOTAPE) TODD (voice-over): As he faces the investigative music in Britain, critical mass builds to look into the actions of Rupert Murdoch's companies in the u.s. several lawmakers are now calling for investigations into whether Murdoch's tabloids hacked the phones of Americans. Powerful Senator Jay Rockefeller is leading that charge. He's especially concerned over reports that 9/11 victims' phones were hacked and he told CNN his bet is they'll find, "criminal stuff." I caught up with Rockefeller.

SEN. JAY ROCKEFELLER (D), COMMERCE COMMITTEE: You know the Department of Justice and all kinds of other federal agencies are going to be going after this very hard, and we will, too. I mean, this is a - it's really repugnant, you know, that one man can control so many.

TODD (on camera): Do you have specific information that Americans that 9/11 victims had their phones hacked?

ROCKEFELLER): We will find out.

TODD (voice-over): At least two relatives of 9/11 victims are joining in this call. Contacted by CNN, the Justice Department wouldn't comment on whether an investigation has been launched. Rockefeller called for the probe after victims of 9/11 were reported to have been among the targets of British papers. "The Daily Mirror" a rival of Murdoch's papers, asserted that a New York private investigator said he'd been asked by "News of the World" journalists to hack victims' phones but that he turned down the job.

It's unclear if the tabloid journalists were after the victims of American or British 9/11 victims or both. Murdoch's company, the News Corporation, owner of some of the London papers that had been the focus of the outrage is based in the United States. Its outlets include "The Wall Street Journal," "The New York Post" and Fox News Channel. Paul Farhi of "The Washington Post" says it's too early to tell if those operations will suffer legally from an investigation.

(on camera): What kind of public backlash could there be against Rupert Murdoch and his entities in the U.S., do you think? Even if this doesn't come to full true fruition? These investigations?

PAUL FARHI, "WASHINGTON POST": We know him through Fox News, "The Wall Street Journal," "The New York Post" and all the TV stations he owns in this country. So he has plenty of enemies in this country. And this could be, and I stress the could be, the moment when they get a lot more ammunition to use against him.

(END VIDEOTAPE)

TODD: We contacted News Corporation to ask if they would respond to calls for investigations. If they could shed light on the alleged attempt to hack Americans and if they've launched their own investigation. A spokesman there would not comment. Wolf?

BLITZER: Is it for sure that U.S. law enforcement agencies will, in fact, investigate Murdoch's operations here in the United States and if they do, I mean, what would the penalties be?

TODD: Legal experts tell us it's not a slam dunk that U.S. agencies will investigate if the Justice Department, for example, finds that British investigative agencies are doing a sufficient job and really going after them thoroughly then the Americans might step aside. As for the penalties, experts say that there could be some serious jail time if privacy laws were violated. And one senator wants to investigate whether these tabloid journalists actually paid for information. If it's found that they did, there could be some very serious fines into the millions of dollars.

BLITZER: Yes, we spoke to Senator Bob Menendez of New Jersey. He wants a full investigation. The attorney general of the United States, Eric Holder, the FBI, he wants them al to get involved. We'll see what happens.

Brian, thank you.

Murdoch's vast American media empire encompasses dozens of companies worth billions of dollars. CNN's Becky Anderson has a closer look.

(BEGIN VIDEOTAPE)

BECKY ANDERSON, CNN INTERNATIONAL ANCHOR (on camera): News Corp has plenty at stake in the United States including the majority of its profits. Its television sector earns the company $15 billion a year. That is largely thanks to the success of Fox Network. You'll know that. And hit shows like "American Idol," "24," and the "Simpsons." Also News Corp owns Fox Sports and 27 television stations from New York to Los Angeles.

In fact, when you look at the map, across the country, each of these antennas actually represents a station that is under Murdoch's control. And this, also, of course, Fox News, Fox Business and other cable networks including FX and the National Geographic channel.

Moving on from TV for you, Murdoch's film division is also highly lucrative, bringing in more than $7 billion a year. Largely thanks to the success of popular 20th century Fox Films such as "Avatar" and "Star Wars," "X-Men" franchises. Its newspaper holdings also important. Also profitable in the U.S. with such titles as "The Wall Street Journal" and "New York Post" and finally News Corp owns the U.S. publisher Harper Collins with notable such authors as J.R.R. Tolkien and C.S. Lewis under their belt.

(END VIDEOTAPE)

BLITZER: Becky Anderson, thank you.

And even as the British Prime Minister David Cameron was announcing a public inquiry into the scandal, he was being blasted, himself, in Parliament for hiring a former Murdoch editor as his spokesman. Listen to this blistering criticism and then Cameron's response. (BEGIN VIDEO CLIP)

ED MILLIBAND, BRITISH PARLIAMENT: He just doesn't get it. He just doesn't get it. I say this to the prime minister. He was warned by the deputy prime minister about hiring Andy Coulson. He was warned by Lord Ashtown about hiring Andy Coulson. He has now admitted in the House of Commons today that his chief of staff was given complete evidence which contradicted Andy Coulson's previous accounts. The prime minister must now publish the fullest account of all the information that was provided and what he did and why those warnings went unheeded.

DAVID CAMERON, BRITISH PRIME MINISTER: The decision to employ a tabloid editor meant there were a number of people who said this was not a good idea, particularly when that tabloid editor had been at "The News of the World" when bad things happened. The decision I made was to accept the assurances that he gave me. As I've said, those were assurances given to the police, to a select committee and to a court of law.

If I was lied to, if others were lied to, that would be a matter of deep regret. I couldn't be clearer about it than that. We must make sure we judge people as innocent until proven guilty.

GRAHAM STUART, BRITISH PARLIAMENT: Can the prime minister assure the house all illegal press activity under the last government will be investigated now? And that this will include the criminal conspiracy between the highest levels in that last government, with parts of the Murdoch empire, including - bragging of bank accounts of Lord Ashcroft in a bid to undermine him and his positions as laid out in dirty politics, dirty times?

CAMERON: In public life we all are subject to huge amounts of extra scrutiny. That's fair. But it's not fair when laws are broken. I mean, we've all suffered from this. And the fact is we've all been too silent about it. That is part of the problem. (INAUDIBLE) gone through by some media organization but you hold back from dealing with it because you want good relations with the media. What we need is some honesty about this issue on a cross party basis so we can take on this problem.

(END VIDEOTAPE)

BLITZER: Wow. Pretty dramatic stuff in Parliament today.

Meanwhile, shockwaves from the scandal may be rattling number 10 Downing Street. The prime minister's residence. But they're not reaching the White House. At least not yet.

(BEGIN VIDEO CLIP)

JAY CARNEY, WHITE HOUSE PRESS SECRETARY: It's not on our radar in the sense that we're having discussions about it. Everyone reads newspapers and catches the news reports. So we're aware of it, but it's not, you know, we have some other issues we're dealing with.

(END VIDEO CLIP)

BLITZER: To put it mildly.

All right. President Obama shattering a fund-raising record by tens of millions of dollars. How does his campaign war chest compare to those of his Republican rivals?

Plus, we have an exclusive. A CNN crew caught up in a raging fire fight in Libya, continuing to report even as they fear for their lives.

(COMMERCIAL BREAK)

BLITZER: Jack Cafferty is here. He has the "Cafferty file." Jack?

JACK CAFFERTY "CAFFERTY FILE": Wonderful little item here. Restaurant in Monroeville, Pennsylvania, which is just outside Pittsburgh, is banning children under the age of six from its dining room. The owner of McDain's said he decided to change the restaurant's policy after other customers complained about noise and unruly behavior by children dining with parents who did little or nothing to control their offspring. The policy goes into effect Saturday.

If the place was closer, I would call and make a reservation now. McDain's is a small restaurant. It only seats about 40 people. It sits quietly on a golf course. We're not talking Chuck E. Cheese here, you know what I mean? But nonetheless, the decision to ban these little noise makers has caused an uproar in this town. This isn't the first time a restaurant has gotten fed up with tiny diners who can't behave themselves while eating a meal.

Last year, a restaurant called the Old Salty in Carolina Beach, North Carolina, ruffled some feathers. They put a sign in the window saying screaming children will not be tolerated. Well, it was magic. The sign was. While some locals were up in arms about it, that restaurant owner has reported a boom in business as a result. She says diners who are looking for a peaceful meal seek out her restaurant. Of course, badly behaved children are not just a problem in restaurants.

Malaysia Airlines recently announced it's banning infants from first class because of complaints that it received from passengers about crying babies on long flights. Other airlines catering mainly to business travelers have also been pressured to consider child-free sections of their flights. Or even child-free planes. We'll see if that happens, though. See, airlines need paying customers to fill the seats, and kids, whether they're poorly behaved or not, are part of that equation.

Anyway, here's the question. Restaurant in Pennsylvania banned children under the age of six. Is that fair? Go to cnn.com/caffertyfile and post a comment on my blog. I think everybody can relate, Wolf.

BLITZER: Certainly can, Jack. I'm fascinated by this story. See what our viewers think as well. Thank you.

CAFFERTY: All right.

BLITZER: A CNN crew including our senior international correspondent Ben Wedeman came under fire today while covering the fighting in Libya. They were in a town that was taken over by rebels a couple of weeks ago. They ran into some unexpected gunfire as Moammar Gadhafi's forces were trying to approach a checkpoint. Our camerawoman Mary Rogers continued to shoot under incoming gunfire. Listen to this and watch.

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: Our driver -

UNIDENTIFIED MALE: Get in the car, Mary.

UNIDENTIFIED FEMALE: You guys. Wait.

UNIDENTIFIED MALE: OK.

UNIDENTIFIED FEMALE: Wait. Wait. Wait!

UNIDENTIFIED MALE: Wait, wait, wait. You in, Mary?

UNIDENTIFIED FEMALE: Yes, I'm in.

UNIDENTIFIED MALE: OK. Just calm down.

UNIDENTIFIED MALE: Get down.

BEN WEDEMAN, SENIOR INTERNATIONAL CORRESPONDENT: We're leaving this area because there's gunfire all around us, and we believe that Gadhafi's forces are doing a roundabout movement. So we are rushing out of this area.

(END VIDEOTAPE)

BLITZER: I spoke with Ben Wedeman in the last hour. He told me that the rebels took back the town. He and the crew, thank god, they are fine.

Republicans are taking a hard line stance when it comes to tax hikes saying they don't belong in any deficit reduction deal. But has that position tied lawmakers hands?

Plus Team USA and France battle it out over at the World Cup. We're going to tell you which team is advancing to the next finals. I suspect you probably know.

(COMMERCIAL BREAK)

BLITZER: Another deadly terror attack in Mumbai. Lisa Sylvester is monitoring that and some of the other top stories in "The Situation Room." What's going on, Lisa? LISA SYLVESTER, CNN CORRESPONDENT: Hi, Wolf. At least 21 people are dead and more than 100 wounded after three bombs exploded within minutes of each other. Officials say they were coordinated by terrorists but no suspects have been identified. Today's attack is the first in Mumbai since the city's 2008 terror siege that left 164 people dead.

Here in the U.S., figures obtained from this TSA reveal more than 25,000 security breaches at the nation's airports over the last 10 years. The TSA say the cases represent the tiny fraction of the billions of travelers screened and says all incidents were investigated and resolved.

And a huge development in the world of sports. The United States' Women's soccer team is headed to the World Cup finals. Team USA advanced after defeating France 3-1. They'll take on Japan on Sunday to see who takes home the trophy. Looking good there, Wolf.

BLITZER: We'll be watching. Certainly we'll be watching that. Thanks very much.

More than $86 million, that's how much President Obama raised in just three months for his re-election campaign. That's the most money ever raised in a single quarter by an incumbent president and shatters the old record set by George W. Bush by some $36 million.

Our chief White House correspondent Jessica Yellin is here to take us through the numbers right now. Jessica, how does all this compare with what the Republican presidential candidates raised over the past three months?

JESSICA YELLIN, CNN CHIEF WHITE HOUSE CORRESPONDENT: Wolf, simply it dwarfs the numbers that the Republicans have raised so far. Let's compare apples to apples. So just the amount of money raised for the Obama campaign, alone, let's take out the money raised for the Democratic Party. The president raised more than $47 million in just three months. Now, add all the money the major Republican candidates who reported, Michele Bachmann has not reported, so six candidates taken together have raised about $37.5 million.

OK. Now let's break down the president's numbers even further. His haul comes from more than 550,000 individual donors we're told by the campaign. According to the campaign, 98 percent of those donations were in the amount of $250 or less. That's small donors. That's according to the campaign. We have to look at those numbers ourselves and analyze it. But if that's true, that shows grassroots enthusiasm. That's the kind of enthusiasm that matters in a campaign. That's what they said they were looking for. That could translate to a lot more donations down the line.

Here's campaign manager Jim Messina warning the grassroots, though, that despite all these big numbers so far, don't get complacent.

(BEGIN VIDEO CLIP) JIM MESSINA, OBAMA CAMPAIGN MANAGER: We have reason to be proud of what we built so far, but it's going to get tougher from here. GOP outside spending for 2012 could be as much as $500 million. But these groups don't report anything. We're not allowed to see any of those numbers. This is a whole new ball game like we've never faced before. Thank you so much for all you've done.

(END VIDEO CLIP)

YELLIN: Now, that's one side of the story. American cross roads, you've heard of them, the top conservative outside spending group. They say, "the billion dollar Obama team will far outspend the Republican outside groups" and they call that, from Jim Messina, a "fund raising hook."

BLITZER: Let's not forget President Obama supporters have outside spending groups that they've created as well just like the Republicans.

YELLIN: Absolutely.

BLITZER: Have done. And so what's the downside of the Obama campaign making such a big deal about these numbers?

YELLIN: There are a few things. First of all, Republicans are already dinging the president for campaigning. He's been doing it already. Prior to the debt talks, he did no fewer than 30 fund- raisers in three months. Many on the same trip that he also did official events so that the campaign did not pick up the whole travel tab. Also, a number of Democratic donors have complained to me that they think it's unseemly for the president's campaign to be boasting now of such a fat fund-raising haul during what grim economic times when people are out of jobs and when Washington, frankly, can't get its act together to avoid a default.

And then finally, there is what you point out, Wolf, that there is plenty of Democratic money going to outside spending groups on the democratic side. Here's just one.

(BEGIN VIDEO CLIP)

ANNOUNCER: The Republicans have opposed economic reforms at every turn and now they have a plan that would essentially end Medicare for future retirees, slash education while giving huge tax breaks to big oil and the wealthy. We can't rebuild America if they tear down the middle class.

(END VIDEO CLIP)

YELLIN: Clearly that's a Democratic message, so when we talk about undisclosed donors, they're coming on both sides of the aisle.

BLITZER: The president doesn't have a democratic challenger for the party's nomination. Unlike Jimmy Carter who did have a Democratic challenger, Ted Kennedy as a lot of us will remember. He's raising a ton of money right now. Thanks very much, Jessica, for that. He may be the most powerful man you've never heard of here in Washington. Many Republican lawmakers live in fear of breaking his one major rule. No new taxes. My interview with Grover Norquist. That's coming up next.

(COMMERCIAL BREAK)

BLITZER: This just coming in. The fourth day of White House talks, the fourth day in a row have just wrapped up over the White House trying to find some sort of deal on raising the nation's debt limit. The stakes are certainly enormous. There's new pressure on both sides to reach a deal. The credit rating agency Moody's now saying it will review the AAA rating the United States currently holds in light of a possible government default if the debt ceiling isn't raised. Republican presidential candidate Michele Bachmann is dismissing the risk while the chairman of the Federal Reserve is underscoring it.

(BEGIN VIDEO CLIP)

REP. MICHELLE BACHMANN (R), PRESIDENTIAL CANDIDATE: This is a misnomer that I believe that the president and the treasury secretary have been trying to pass off on the American people and it's this. That if Congress fails to raise the debt ceiling by $2.5 trillion, that somehow the United States will go into default and we will lose the full faith and credit of the United States. That is simply not true. It's important to recognize that revenues continue to come in to the United States Treasury. It's merely the president's obligation and the Congress' to make sure that the interest is paid on the debt.

BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: Fairly soon after that date there would have to be significant cuts in social security, Medicare, military pay or some combination of those in order to avoid borrowing more money.

If, in fact, we ended up defaulting on the debt, or even if we didn't, I think, you know, it's possible that simply defaulting on our obligations to our citizens might be enough to create a downgrade in credit ratings and higher interest rates for us, which would be counterproductive, of course, since that makes the deficit worse.

(END VIDEOTAPE)

BLITZER: Moody's is now reviewing the U.S. AAA rating.

Republicans certainly under intense pressure to refuse any new taxes as part of a deal to raise the nation's debt ceiling. Lawmakers who give in risk the wrath of one of the most powerful men here in Washington, a man most Americans probably never heard of. We're talking about Grover Norquist.

We asked Lisa Sylvester to join us right now. I'm going to be speaking to Grover Norquist in a few moments. But give us a little background, Lisa, on who he is.

LISA SYLVESTER, CNN CORRESPONDENT: You know, he's a fascinating guy, Grover Norquist. Actually, he got his start in politics early. At 12, he hopped on a train, and he headed to Boston to volunteer for Richard Nixon. And he has held on to his conservative values ever since. He believes in small government, lower taxes and limited government services.

(BEGIN VIDEOTAPE)

GROVER NORQUIST, PRESIDENT/FOUNDER, AMERICANS FOR TAX REFORM: That's Mitt Romney's. Michele Bachmann's.

SYLVESTER (voice-over): In this black binder are signed pledges from the GOP presidential candidates. Grover Norquist, president and founder of Americans for Tax Reform, have secured their signatures as well as those of most of the congressional Republicans, all committing to not raise taxes. Hundreds of names with the originals safely stored away.

(on camera) So where are the pledges? Everybody wants to know. Where are the pledges?

NORQUIST: We keep the original of the pledges inside a vault that can't be burned, a safe vault. But we keep multiple copies just so that they can't be lost. We want to promise to voters and to elected officials that their pledge will be there forever.

SYLVESTER (voice-over): In some ways, this father of two young toddlers is a study in contrasts. Although politically conservative through and through, he loves Janis Joplin, has figures from the adult animation series "South Park" on his book shelves, and dabbles in improv comedy.

NORQUIST: When midgets play miniature golf, do they know?

SYLVESTER: But Norquist also has the ear of powerful GOP leaders, who often won't act on sensitive budget issues unless he has signed off. Every Wednesday, Norquist convenes a meeting here of prominent Republicans, political activists and GOP operatives to plan strategies.

If someone thinks about breaking the pledge, he likes to remind them of President George H.W. Bush.

GEORGE H.W. BUSH, FORMER PRESIDENT OF THE UNITED STATES: Read my lips. No new taxes.

NORQUIST: The American people were very angry that he'd broken his commitment. And he had a very successful presidency except for the tax increase.

SYLVESTER: In the ongoing debt ceiling negotiations, one point of debate is whether to raise taxes in tandem with government cuts. Norquist is quick to remind Republican lawmakers of their promise. Here is a wall of Republicans who went astray.

NORQUIST: These are people who voted for tax increases, and down below in blue it points out which ones were defeated in the next election.

SYLVESTER: But his position, power and ego have sparked outrage by some of the other side of the political aisle. Michael Ettlinger with the liberal group the Center for American Progress says it makes it harder for congressional leaders to legislate.

MICHAEL ETTLINGER, CENTER FOR AMERICAN PROGRESS: Grover Norquist is a big problem, but I think the people whose feet he's holding to the fire are getting tired of it.

You know, we're getting to the point where we need serious people to sit down and make serious decisions, and drawing really hard lines in the sand the way Grover does is hurting the country. And I think people who signed that pledge are starting to recognize that and realize that that kind of hard line just is not in the best interests of the country.

SYLVESTER: But Norquist is unfazed. It all comes town to the one-line pledge that hangs in the Americans for Tax Reform office.

(END VIDEOTAPE)

SYLVESTER: Now, the group's strength is in the grassroots operations. You know, being able to run ads and make phone calls to either elect or defeat a candidate. And that makes Norquist a very powerful master behind the scenes, even though, you know, Wolf, he has never been elected to office.

BLITZER: Yes, he's been doing this for 25 years. And he says he started doing it at the request of then-president Ronald Reagan.

I had a chance, Lisa, just a little while ago here in THE SITUATION ROOM to question Grover Norquist.

(BEGIN VIDEOTAPE)

BLITZER: In principle, do you agree that, if they don't raise the debt ceiling August 2, it would be a disaster for America?

NORQUIST: If Obama chooses not to cut spending, and we end up with a default, that would be very bad.

BLITZER: That would be the value of the dollar presumably would go down; interest rates would go up. Inflation could occur. That would be a huge hidden tax on almost every American.

NORQUIST: Every problem we have is because Obama has ramped up spending so dramatically in the last two years that it's busting the bank. We need to fix that overspending problem.

BLITZER: They doubled the national debt during the eight years of the Bush administration. You know that.

NORQUIST: Right. We went from spending $2.9 trillion before Obama came into power to $3.8 trillion.

BLITZER: The national debt went from $5 trillion when Bush took office to $10 trillion when he left office.

NORQUIST: Now about $15 trillion after two years. The ramping up over the last two years of massive spending increases is just unbelievable.

BLITZER: All right. So are there any tax reforms that you could support as part of this deal? For example, I'll throw out a few examples of what a lot of people consider to be crazy situations.

John Paulson, who's a hedge fund manager, he made last year $4.9 billion. Billion with a "B." Not million but $4.9 billion. And a big chunk of that income was taxed at 15 percent, not the maximum 35 percent, because it was seen as some sort of capital gains or whatever. Is that fair?

NORQUIST: Well, certainly the Democrats have been arguing to raise the capital gains tax on all Americans. Obama says he wants to do that. That would slow down economic growth. It's not necessarily helpful to the economy.

Every time we've cut the capital gains tax, the economy has grown. Whenever we raise the capital gains tax, it's been damaged. It's one of those taxes that most clearly damages economic growth and jobs.

BLITZER: Shouldn't it be taxed as regular income, 35 percent, like you, and me, and everybody else who's in the highest income bracket?

NORQUIST: If it's capital gain, it should be taxed as capital gain.

BLITZER: But would you change the law so that that would be regular income instead of allowing this -- this tax loophole right now that defines it as a capital gain?

NORQUIST: If you have to change the law to get more money, that's a tax increase, and Americans for Tax Reform supports all efforts of tax reform, getting rid of deductions or credits, or something that's misclassified, as long as you at the same time reduce rates so that it's not a hidden tax.

BLITZER: But you'd be open to changing that law so that he would pay a higher income tax?

NORQUIST: If overall tax burden was not increased, as long as rates come down. I'm for tax reform, not tax increases.

BLITZER: What about General Electric which made last year $14 billion worldwide, $5 billion in the United States, and paid zero in federal income tax. Is that fair?

NORQUIST: OK. Several things. One, if there's a credit or deduction that they're getting -- and I understand they get a lot of Obama's special tax credits that he put in for...

BLITZER: Should that be changed? Should that be eliminated?

NORQUIST: ... then let's get rid of those and reduce rates for those people who are paying taxes other places.

But, again, when businesses pay taxes, you and I pay them. Businesses don't pay taxes. People pay taxes. When they buy things from the grocery store. Grocery stores do not pay taxes. Neither does General Electric.

BLITZER: You'd like to see tax reform so that would be eliminated? So G.E. would pay some -- some income tax in the United States as opposed to paying no income tax?

NORQUIST: And let's bring rates down other places.

BLITZER: The same with -- the same with ExxonMobil. They pay a lot of income tax in Nigeria and other countries around the world, but they don't pay any income tax in the United States because they can deduct that income tax overseas and not have to pay it here. You're open to changing that?

NORQUIST: Look, we ought to go to a territorial system which is what the rest of the world operates on. We tax things that happen in the United States and we don't tax things that happen overseas. Similarly, when people make money in the United States, we tax it and France doesn't. That's a territorial tax system. It's clearly where we're going to. But we ought to move there as quickly as possible.

BLITZER: You're the president of Americans for Tax Reform. It's a very influential group here in Washington. I want to read to you what former president Bill Clinton said in Aspen, Colorado, on July 2. Have you heard this?

NORQUIST: I think so.

BLITZER: Let me read it to our viewers who haven't. He said this. He said, "You're laughing but he" -- referring to you -- "he was quoted in the paper the other day as saying he gave Republican senators permission on getting rid of ethanol subsidies. I thought, 'My God, what has this country come to when one person has to give you permission to do what's best for the country?' It was chilling."

NORQUIST: OK. Typical Bill Clinton, got everything completely wrong. I wondered where one of those quotes came from. What that was, was there was a bill to get rid of the tax credit for ethanol and...

BLITZER: Which you supported.

NORQUIST: Which we support getting rid of that tax credit.

BLITZER: It would be an increase in taxes, though.

NORQUIST: It would. But there was another bill wrapped around it by DeMint which would have, one, eliminated the mandate for ethanol which is the real problem, and two, had a tax cut larger than the other. And we sent a letter to the Hill saying, "If you want to make sure you haven't raised taxes, those two bills together do exactly that."

BLITZER: So basically he's right when he says you gave them permission to vote to eliminate the subsidies for ethanol?

NORQUIST: No. We just made it clear that the two bills together didn't violate the pledge. They chose when they ran for office to commit in writing to their constituents, not to me, to their constituents. Here's where Bill Clinton gets it wrong. Nobody promises me anything. They promise when they get elected to the people in their state and their congressional district, "I'm not going to raise your taxes." And...

BLITZER: That's the pledge they make to the Americans for Tax Reform.

NORQUIST: No, to the American people. It's the Americans for Tax Reform pledge, so that it's the same wording in all 50 states so people know what it is. They commit to their voters they won't raise taxes.

There was a confusion, because Coburn was trying to confuse people, as to whether this was a tax increase. We wrote letters saying, "No, it's not. It's not a tax increase" so that they could be comfortable that they weren't getting tricked by Senator Coburn into a tax hike.

BLITZER: You like it when people say you're one of the most powerful men in America?

NORQUIST: It's a little bit silly. The American taxpayers are a powerful force. They don't want their taxes raised. Obama and the Democrats have a fight with the American people, not with me.

BLITZER: Grover Norquist, thanks for coming in.

NORQUIST: Thank you.

(END VIDEOTAPE)

BLITZER: Republicans may not be budging when it comes to tax hikes in the ongoing deficit talks. But have they now painted themselves into a corner on the issue? More on the story. We go in- depth. David Gergen standing by. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Let's dig deeper on this battle over raising the nation's debt ceiling. And joining us now, our senior political analyst David Gergen.

David, you just saw my interview with Grover Norquist. Explain to our viewers here in the United States and around the world why this man is so powerful. DAVID GERGEN, CNN POLITICAL ANALYST: Well, as he, himself, said, it's not just because he's Grover Norquist. It is because there is a strong populist anti-tax sentiment in this country that's been there for a long time. It's intense today. And Grover Norquist has been smart enough, tough enough to put himself at the head of that parade.

So when he speaks, when he calls attention to these pledges, they matter. In this -- there are now in the House of Representatives among Republicans only six members of the current House did not take that pledge, Wolf, during the campaign. That means everybody else has pledged to -- against raising taxes, and they've tied their hands.

Grover Norquist is also a tough customer. He has complained for years that any time Republicans make deals with Democrats, their Democrats welsh the deal. He said publicly, quote, "Bipartisanship is a form of date rape." Very, very tough language. And he does not mind -- he does not mind using the whip on people who get out of line.

BLITZER: Like you, I've been in Washington a long time. The frustration level right now, enormous, and the stakes clearly enormous, as well. Listen to what John McCain said today. I'll play the clip.

(BEGIN VIDEO CLIP)

SEN. JOHN MCCAIN (R), ARIZONA: My kids and my grandkids, I am very worried about because we have spent ourselves into a hole that we can only make very tough decisions, and clearly, we are not making those decisions here in Washington, D.C. It's hard trying to do the Lord's work in the city of Satan.

(END VIDEO CLIP)

BLITZER: He's used that line before, but it's still a very powerful line, David.

GERGEN: It sure is. And I think what we're seeing, Wolf, is the dysfunctionality of Washington, which is usually below the surface, is now in stark review for all Americans to see. We've gone through this a couple times before in recent years.

And when you really look at this closely, you know, it's like that old saying about you never want to see sausages made. You just want to see them at the end of the day. We're watching the sausage get made now. And it's not pretty.

But I do think right now is we're facing two crises. One is the debt ceiling. And Mitch McConnell, you know, has come up with this plan, which is very controversial among conservatives, but at least recognizes we've got to get -- we've got to lift the debt ceiling. And John McCain recognized it.

But even if we use the McConnell plan, that doesn't solve the second crisis. And that is we have debts that are so large that, if we don't solve it soon, the credit rating agencies, as you said -- talking about Moody's, S&P, Fitch -- they're all out there going to say, there's a real -- very real danger, growing danger they will downgrade America's credit ratings.

BLITZER: The stakes for that -- results would be enormous, as well. David, thanks very much. We'll continue this tomorrow.

I want our viewers to check out my blog at CNN.com/SituationRoom. I write about what the stakes are of failure. Failure, I must say, cannot be an option right now, because all of us -- all of us -- would be enormously affected if they fail to achieve positive results.

Risking arrest simply for going to church. That's the frightening reality for so many Christians in China. We have a rare inside look at an underground service in Beijing. That's coming up next.

(COMMERCIAL BREAK)

BLITZER: China's crackdown on Christians isn't letting up. CNN's Eunice -- Eunice Yoon got an access to an underground church service in Beijing.

(BEGIN VIDEOTAPE)

EUNICE YOON, CNN CORRESPONDENT (voice-over): These Christians in Beijing asked us not to show their faces. They're worshipping on a Sunday just like so many others around the world, but what they're doing is against the law here.

(on camera) It's really difficult to get access to these informal churches because they're not approved by the government. These people have been kind enough to let us film here, but they're taking a really big risk.

(voice-over) In China, the government strictly controls religious activity, requiring Christians to worship only at churches sanctioned by the state. The rest, like this one run by pastor Ezra Jin are unregistered and therefore banned. So-called house churches, which generally start in people's homes, have been left alone in recent years but now are under scrutiny amid a wider crackdown on dissent in the wake of the Arab Spring.

The government has concerns, he says, because we are well organized and outside the establishment. For months congregants of one of Beijing's largest underground churches, Shao Wong (ph), have been detained, its leaders under house arrest. The Chinese government says the worshippers have been illegally gathering in the streets.

Still, parishioners here continue to worship the way they want.

"I'm not scared," she says. "I believe God will be with me."

The Chinese government maintains it allows freedom of religion. American televangelist Franklin Graham says China has allowed Christianity to grow here, despite Beijing's concerns the church could undermine the state's authority.

REV. FRANKLIN GRAHAM, SAMARITAN'S PURSE: I've seen the changes they've made in 20 years, so -- and I believe there will be more changes to come.

YOON: Pastor Jin wants to stand up for those changes. In a rare public move, he and over a dozen Christian leaders have signed a petition calling on China's leadership to allow greater religious freedoms.

"Shao Wong's (ph) case could deteriorate into a massive crackdown," he says. "We are at a critical moment, and we are ready to pay the price."

For a power even higher, in their eyes, than the Chinese government.

Eunice Yoon, CNN.

(END VIDEOTAPE)

BLITZER: Let's get right back to Jack. He's got "The Cafferty File" -- Jack.

CAFFERTY: The question this hour: "There's a restaurant called McDain's right outside Pittsburgh, Pennsylvania, that has banned children under the age of 6. Is that fair?"

Julianne writes, "Absolutely. Asking parents to keep their kids under control isn't being unreasonable. It's called being considerate of others. There's nothing wrong with parents teaching their children good manners. If children don't learn to respect others when they're young, when exactly are they going to learn?"

Sandra writes, "Yes. In fact, I would ask those parents with older kids who behave like obnoxious spoiled brats to leave. Unfortunately, many that are yelling and screaming in restaurants are older and should already have some manners. Somewhere along the line someone decided that ill-mannered children should be tolerated by all of us. If people wish to raise their kids without respect for others, then they shouldn't bother to subject them to the public."

Ed writes, "Yes, in fact, let him do that. Of course, everyone who disagrees with his position has the right to not use the establishment and to stand outside and protest his actions. I hope he's out of business in three to six months."

Jennifer in Arizona: "The problem is really the parents, not the kids. My husband and I are very aware of our children's behavior. When our boys even act like they're going..." I don't want to read that.

Diana writes, "This is discrimination against people with small children. What's next? Adult-only subway cars? Adult-only buses? Adult-only movie theaters."

I think those are all good ideas, actually.

Jim writes, "Given our druthers, my wife and I would only go to establishments that did not tolerate noisy, disruptive behavior from underage children. We shake our heads in dismay at those who are supposed to be acting like parents who then allow their children to run amok. I wish this place was closer to Washington, D.C. I would go there."

Jane writes, "It's probably a moot question, but what family with little kids can afford to eat out?"

If you want to read more on this, go to my blog. Got some pretty funny e-mails. CNN.com/CaffertyFile.

BLITZER: All right, Jack. Thanks very much. See you back here tomorrow.

A female Marine is hoping Justin Timberlake will take his own advice. Stay with us. Jeanne Moos coming up next.

(COMMERCIAL BREAK)

BLITZER: Justin Timberlake gets plenty of invitations but none quite like this. Here's CNN's Jeanne Moos.

(BEGIN VIDEOTAPE)

JEANNE MOOS, CNN CORRESPONDENT (voice-over): This female Marine is asking Justin Timberlake out on a date...

CORPORAL KELSEY DE SANTIS, U.S. MARINE CORPS: Well, I'm going to call you out.

MOOS: ... hoping he'll take his own advice.

JUSTIN TIMBERLAKE, SINGER/ACTOR: Do it for your country.

MOOS: That's what Timberlake told his co-star, Mila Kunis, after a male Marine stationed in Afghanistan tilted his shades and asked Mila out via YouTube.

SERGEANT SCOTT MOORE, U.S. MARINE CORPS: Hey, Mila, Sergeant Moore, but you can call me Scotty.

MILA KUNIS, ACTRESS: What?

MOORE: I just want to take a moment out of my day to invite you to the Marine Corps ball on November 18 in Greenville, North Carolina, with your truly. So take a second. Think about it. Get back to me.

MOOS: Now chances are the last time Mila Kunis was asked out on a semi-blind date was when CNN's own Wolf Blitzer invited her to the White House Correspondents' Dinner.

KUNIS: This is my date!

MOOS: Though Wolf was more famous than Sergeant Scott Moore, the sergeant had Justin Timberlake on his side during a FOX News interview.

TIMBERLAKE: This needs to go down. This needs to happen. Do it for your country.

KUNIS: I'll do it for you.

MOOS (on camera): Yes, well, you do it for your country, Justin Timberlake, because now this Marine wants you.

DE SANTIS: On the phone. Justin, you want to call out my girl, Mila. Well, I'm going to call you out and ask you to go to the Marine Corps ball with me on November 12 in Washington, D.C.

MOOS (voice-over): Corporal Kelsey De Santis is the only female Marine at the Martial Arts Center for Excellence at Quantico. She's an instructor with a black belt who sometimes does cage fights.

Kelsey is a fan of Timberlake's. She got the idea to invite him to the Marine Corps ball after seeing him so enthusiastically tell Mila Kunis to go.

Her friends set up a Facebook page called "Let's get Justin Timberlake to the Marine Corps ball with Kelsey," complete with an array of photos so impressive, well, how could Timberlake tell her to go jump in a lake? Or even a river?

DE SANTIS: And if you can't go, all I have to say is cry me a river.

(MUSIC: JUSTIN TIMBERLAKE'S "CRY ME A RIVER")

MOOS (on camera): Hey, the corporal's got a tattoo, too, and that's just the one we can see.

(voice-over) When we asked the friend who helped set up the Facebook page whether Kelsey could kick Justin Timberlake's butt if he turned her down, she said, "Oh, yes, for sure."

This Marine isn't looking for a few good men, just one.

TIMBERLAKE: Do it for your country.

MOOS: Jeanne Moos...

DE SANTIS: Hit me up.

MOOS: ... CNN, New York.

(END VIDEOTAPE)

BLITZER: That's it for me. I'm Wolf Blitzer in THE SITUATION ROOM. For our international viewers, "WORLD REPORT" is next. In North America, "JOHN KING USA" starts right now.