Fiscal cliff: Obama backs off hard lines in search of compromise

This Nov. 16, 2012, photo shows President Barack Obama with House Speaker John Boehner of Ohio in the Roosevelt Room of the White House in Washington, during a meeting to discuss the deficit and economy. Congress and the White House can significantly soften the initial impact of the “fiscal cliff” even if they fail to reach a compromise by Dec. 31. One thing they cannot control, however, is the financial markets' reaction, which possibly could be a panicky sell-off that triggers economic reversals worldwide. The stock market's unpredictability is perhaps the biggest wild card in the political showdown over the fiscal cliff. (AP Photo/Carolyn Kaster, File)

This Nov. 16, 2012, photo shows President Barack Obama with House Speaker John Boehner of Ohio in the Roosevelt Room of the White House in Washington, during a meeting to discuss the deficit and economy. Congress and the White House can significantly soften the initial impact of the “fiscal cliff” even if they fail to reach a compromise by Dec. 31. One thing they cannot control, however, is the financial markets' reaction, which possibly could be a panicky sell-off that triggers economic reversals worldwide. The stock market's unpredictability is perhaps the biggest wild card in the political showdown over the fiscal cliff. (AP Photo/Carolyn Kaster, File)

WASHINGTON — Just two weeks before the economy-threatening "fiscal cliff" is due to kick in, both President Barack Obama and House Speaker John Boehner are making significant concessions, backing off what had once been ironclad positions on how to avoid the huge automatic spending cuts and tax increases.

The moves signal a new stage in the negotiations, which picked up steam Monday with Obama's offer to drop his long-held insistence that taxes rise on individuals earning more than $200,000 and families making more than $250,000. He is now offering a new threshold of $400,000 and lowering his 10-year tax revenue goals from the $1.6 trillion he had argued for a few weeks ago.

Obama's move follows concessions by Boehner on higher tax rates for the wealthy.

In the new proposal, Obama abandoned his demand for permanent borrowing authority. Instead, he is now asking for a new debt limit that would last two years, putting its renewal beyond the politics of a 2014 midterm election.

And in a move sure to create heartburn among some congressional Democrats, Obama is proposing lower cost-of-living increases for Social Security beneficiaries, employing an inflation index that would have far-reaching consequences, including pushing more people into higher income tax brackets.

Those changes, as well as Obama's decision not to seek an extension of a temporary payroll tax cut, would force higher tax payments on the middle class, a wide swath of the population that Obama has repeatedly said he wanted to protect from tax increases.

As public posturing has given way to pragmatism, both sides still seem willing to lock in on a substantial agreement rather than just putting off a fiscal day of reckoning. To that end, Obama has conceded that a big bargain would require giving up some of his proposals.

"I understand that I don't expect the Republicans simply to adopt my budget," he said during his post-election news conference last month. "That's not realistic. So, I recognize we're going to have to compromise."

The talks, facing a looming deadline, seek to avoid across-the-board tax hikes for nearly all wage-earners as well as spending cuts at the Pentagon and in domestic programs that are set to kick in at the start of the new year. Economists inside and outside the government have warned that the combination of the two — the "fiscal cliff" — could stall a weak recovery and threaten a new recession.

Obama's steps toward Boehner came after the House speaker took a plunge in a call to Obama on Friday — while the nation was focused on the horror of a mass murder in Newtown, Conn. — and agreed to accept an increase in tax rates for taxpayers who earn more than $1 million. Boehner's plan would raise about $1 trillion in taxes over 10 years.

That was a barrier-breaking moment, changing the negotiations from a fundamental debate over whether tax rates should rise at all to quibbling over who should pay them.

There are still plenty of disputes to iron out. And people familiar with Obama's proposal were careful not to describe it as his final offer.

The Obama plan seeks $1.2 trillion in revenue over 10 years and $1.2 trillion in 10-year spending reductions. Boehner aides say the revenue is closer to $1.3 trillion if revenue triggered by the new inflation index is counted, and they say the spending reductions are closer to $930 billion if one discounts about $290 billion in lower estimated debt interest.

"Any movement away from the unrealistic offers the President has made previously is a step in the right direction," Boehner spokesman Brendan Buck said. "But a proposal that includes $1.3 trillion in revenue for only $930 billion in spending cuts cannot be considered balanced."

Either way, though, there is no doubt Obama has moved in Boehner's direction after Boehner opened the door to a tax rate increase.

Obama's plan, like Boehner's, would also raise taxes on dividends and capital gains from 15 percent to 20 percent. Both would also reduce the number of deductions and exemptions that wealthy taxpayers can claim. Obama's proposal also would let estate taxes revert to 55 percent on estates after allowance for a $1 million exemption.

In making his offer, Obama stiff-armed Republican demands to increase the eligibility age for Medicare from 65 to 67, a goal Democrats strongly reject. He also sought to contain cuts in Medicare and other health care programs to about $400 billion over 10 years, less than what Republicans want. And he is continuing to seek spending on unemployment assistance and on public works projects.

Obama's willingness to reduce future cost-of-living increases in Social Security would also mean smaller annual increases in government pensions and veterans' benefits. Annual adjustments to income tax brackets would be smaller, pushing more people into higher tax brackets.

Over time, because annual adjustments to the poverty level would be smaller, the new index could reduce the number of people eligible for programs such as Medicaid, Head Start, food stamps, school lunches and home heating assistance.

To avoid some of that risk, Obama wants lower-income recipients to receive protection against any loss from scaling back future cost-of-living increases, people familiar with his plan said.

EARLIER:

Sources: New Obama offer moves toward Boehner

WASHINGTON — President Barack Obama has agreed to curtail future cost-of-living increases for recipients of Social Security and softened his demand for higher taxes at upper income levels as part of accelerating negotiations with House Speaker John Boehner to avoid a "fiscal cliff," people familiar with the talks said Monday.

Speaking a few hours after Obama and Boehner met at the White House, these people said the president was now seeking a higher tax rate beginning at incomes over $400,000, up from the levels of $200,000 for individuals and $250,000 for couples that were cornerstones of his successful campaign for re-election.

Obama's willingness to reduce future cost-of-living increases in Social Security, government retirement and numerous other programs marked another clear concession to Boehner, although it came with an asterisk. The president wants lower-income recipients to receive protection against any loss from scaling back future cost of living increases, these officials said.

Nor did Obama's offer include raising the age of Medicare eligibility from 65 to 67, a Republican goal that has drawn particularly strong objections from Democratic liberals.

Several officials also said during the day that Boehner's offer late last week to accept higher tax rates included provisions that would mean higher taxes on investment income and dividends earned by wealthy Americans and also in the estate tax.

The people who described the talks did so on condition of anonymity, citing the secretive nature of the discussions.

The maneuvering is aimed at reaching an agreement that would include cancellation of a scheduled year-end hike in taxes for nearly all wage-earners as well as spending cuts at the Pentagon and in domestic programs across the government.

Economists inside and outside the government have warned that the combination of the two, set to begin at year's end, could send the economy into recession.

Other major issues are part of the negotiations. Without action by Congress, for example, long-term unemployment benefits will expire for millions at the end of the year, and doctors will face a cut in the payments they receive for treating Medicare patients.

Obama has also called for assistance for hard-pressed homeowners as well as fresh economic stimulus measures, and some Democrats want to include a sizeable amount of disaster aid in any legislation to offset the cost of Superstorm Sandy.

On other points, Obama's latest offer dropped his earlier proposal to extend a payroll tax cut due to expire at year's end, and he agreed to find more savings in government spending than in his earlier offer.

The new offer that was given to Boehner at the White House closed the gap between the two men considerably on a framework for a deal.

At the same time, with rank and file conservatives distressed about over higher taxes, aides to the Ohio Republican were quick to find fault with Obama's latest offer.

Brendan Buck, a spokesman, said that "a proposal that includes $1.3 trillion in revenue for only $930 billion in spending cuts cannot be considered balanced. We hope to continue discussions with the president so we can reach an agreement that is truly balanced and begins to solve out spending problems."

Earlier, at the White House, spokesman Jay Carney sidestepped when asked about curbing cost-of-living increases for benefit programs. The president "is prepared to make tough choices. He also understands that his bill will not, as written, likely be what the final compromise, if there is one, looks like," he said.

"But he insists and will insist before he signed anything that there is the balance that he seeks that is fair and that seniors aren't bearing the burden so that the wealthy bear less — those who can afford it most bear less."

A spokesman for Boehner declined comment on the tax proposals.

Obama and Treasury Secretary Tim Geithner met with Boehner and his top aides at the White House for less than an hour during the day. While neither side provided significant details, Republicans have made it clear in recent days that it is the president's turn to propose savings from Medicare and other benefit program following Boehner's agreement last week to let tax rates rise at incomes higher than $1 million.

Officials familiar with the talks said that under the Ohio Republican's proposal, the top tax rate on capital gains would go to 20 percent, up from the current 15 percent. The top rate on dividends also would climb, although it was not known what the new level would be, and the estate tax would also be adjusted to produce more government revenue.

Under current law, the top capital gains tax rate would rise to 20 percent automatically at the end of the year if the cuts enacted during George W. Bush's White House tenure were allowed to expire.

The tax on dividends would also rise. The estate tax would be 55 percent on estates after allowance for a $1 million exemption.

As the talks progress, Republicans across the party's spectrum are eager to turn public attention toward spending cuts, rather than remain bogged down in a politically debilitating debate about tax increases.

"Our problem isn't that we tax too little. It's that we spend too much! We must have serious spending cuts for a debt ceiling increase," tweeted Rep. Tom Price., R-Ga.

That was a reference to the third ingredient under negotiation as part of deal to prevent the economy from reaching the fiscal cliff — an increase in the government's borrowing authority.

After a brush with the first-ever default by the Treasury in 2011, Obama is demanding that any fiscal cliff compromise give him authority to raise the current $16.4 trillion cap without a prior vote by Congress. Officials say that Boehner's most recent proposal would grant an increase equal to the size of any spending cuts, roughly $1 trillion under his own recommendations.

The speaker made his offer to Obama late last week, dropping his blanket opposition to the president's call for an increase in the tax rate paid on upper incomes. Obama's agreement to reduce his demand so it would affect incomes over $400,000 left the two sides closer, but short of agreement.

As part of the change, Obama is now seeking $1.2 trillion in additional revenue, down from $1.4 trillion that was in an offer he made several days ago.

Officials have said Boehner offered a total of $1 trillion in higher revenue, less than half of which would come this year, and the balance in 2013 as part of a bill to overhaul the tax code.

Some of the increased revenue to be provided immediately would come from setting the tax rate on income over $1 million at 39.5 percent, up from the current 35 percent. The balance would come from higher taxes on capital gains, dividends and other provisions.

The proposal to scale back cost-of-living increases is a regular at deficit reduction talks.

Obama tentatively agreed to back it more than a year ago in talks with Boehner that eventually collapsed, although he sought steps to shelter the lowest-income beneficiaries from its effects.

Democrats have said they would object much more strongly if the president would to accept a plan to raise the Medicare eligibility age from 65 to 67. He was ready to embrace that proposal in the earlier round of talks, but he would face opposition from congressional Democrats and the AARP as well as other groups in the current political climate.

The new inflation adjustment would create government savings of an estimated $168 billion over a decade, according to a recent estimate by the Congressional Budget Office. It also would raise tax revenue by $54 billion by affecting the adjustment in income tax brackets that occurs annually to take inflation into account, CBO said.

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