Obama Reduces Tax Demand as Budget Talks Inch Forward

Dec. 12 (Bloomberg) -- Bloomberg's Peter Cook and Hans Nichols decipher comments from GOP leadership on the fiscal cliff and explain the politics behind the negotiations. They speak on Bloomberg Television's "Market Makers."

President Barack Obama reduced his demand for tax increases to $1.4 trillion from $1.6 trillion as he and House Speaker John Boehner traded another round of offers and inched toward a budget agreement.

Boehner told fellow House Republicans during a private meeting today that Obama hasn’t been reasonable, according to a House Republican aide who asked for anonymity and wasn’t authorized to speak publicly about the discussions. Republicans believe they have been reasonable by proposing new revenue and spending cuts, Boehner said during the meeting, according to the aide.

Senate Majority Leader Harry Reid of Nevada said on the Senate floor today he was “very, very disappointed” with the lack of progress. He said Republicans will either agree to raise tax rates on top earners, “or we are going to go over the cliff” of tax increases and spending cuts scheduled to begin in January.

The two sides remain hundreds of billions of dollars apart on taxes and spending, and they continue to disagree on whether a year-end deal should include an increase in the debt limit and fresh programs to boost the economy. Obama and Boehner, of Ohio, spoke by telephone yesterday, according to another Republican congressional aide and an administration official who asked for anonymity.

Upper Boundary

Obama’s latest offer better reflects the upper boundary of tax revenue Democrats could support. His budget plan earlier this year had more than $200 billion in tax increases on dividends and estates that couldn’t get through the Democratic- controlled Senate.

Asked about prospects for a budget deal, House Republican Whip Kevin McCarthy of California told reporters that Obama “changes what he asks for so I get less confident.”

The offers came amid pressure to reach an agreement as soon as possible so it can be sold to lawmakers and passed in Congress. Lawmakers outside of leadership have largely been left out of the talks, and some say they’re worried that Obama and Boehner will hand them a deal just before the Christmas holiday and ask them to pass it before tax cuts lapse Dec. 31.

“I’m concerned about ending up with an agreement at the very last minute that you hardly have the chance to digest, let alone understand all of it, all of its implications,” said Senator Ben Nelson of Nebraska, the final Democratic holdout on the 2010 health-care law, told reporters in Washington.

Tax Increase

If Congress doesn’t act, more than $600 billion in tax increases and spending cuts, the so-called fiscal cliff, will start taking effect Jan. 1. Tax rates for income at all levels would rise, along with taxes on estates, capital gains and dividends.

Republicans sent Obama a fresh proposal yesterday in response to an offer Obama made Dec. 10, said Michael Steel, a spokesman for Boehner who didn’t provide details about the Republican plan.

Obama dropped his revenue demand to $1.4 trillion from $1.6 trillion, said a third Republican congressional aide who asked for anonymity to discuss the private offer. Republicans still have an $800 billion revenue target, party aides said.

The president’s plan also would include a corporate tax overhaul, according to an official familiar with the negotiations who wasn’t authorized to describe them publicly and asked to not be named.

Obama Mandate

Sixty-five percent of Americans say Obama’s Nov. 6 election victory gave him a mandate on his proposal to raise tax rates on top earners, according to a Bloomberg National Poll of 1,000 adults conducted Dec. 7-10.

In an interview with ABC yesterday, Obama said he was willing to make difficult choices on spending, provided Republicans concede on taxes.

“Taxes are going to go up one way or another,” he said. “And I think the key is that taxes go up on high-income individuals.”

Boehner said he was still “hopeful” about reaching a deal and was waiting for Obama to propose specific spending cuts.

“Right now the American people have to be scratching their heads and wondering: When is the president going to get serious?” Boehner said on the House floor in his first remarks since his direct talks with Obama resumed Dec. 9.

Jay Carney, the White House press secretary, said Obama’s 2013 budget includes plenty of spending cuts, which the White House outlined in a blog post.

“There’s a lot of specificity in there,” Carney told reporters at his daily briefing. “We have not seen anything like that kind of specificity from Republicans.”

Eligibility Age

Obama didn’t reject the idea of raising the age --currently 65 -- for Medicare eligibility.

“When you look at the evidence, it’s not clear that it actually saves a lot of money,” he told ABC. “But what I’ve said is let’s look at every avenue, because what is true is we need to strengthen Social Security, we need to strengthen Medicare for future generations.”

The Congressional Budget Office has said a stalemate probably would lead to a recession in the first half of 2013. Obama and Boehner are trying to replace the immediate deficit reduction with gradual tax and spending changes.

Market Response

The Standard & Poor’s 500 Index (SPX) rose 0.3 percent to 1,432.15 at 9:31 a.m. in New York. Treasuries pared losses before Federal Reserve officials announce results of their two- day policy meeting.

Each day that passes without a deal increases the pressure on lawmakers to act quickly if Boehner and Obama reach agreement. That could saddle Democrats with entitlement cuts such as a change in the formula for calculating cost-of-living benefit adjustments or an increase in the Medicare eligibility age. Republicans worry they will be asked to endorse the higher tax rates for top earners Obama is demanding.

“There’s very little I’m not worried about in connection with this,” said Senator Mike Lee, a Utah Republican. “A take- it-or-leave-it approach sometimes pressures people into voting for something they might not otherwise want to. One way or another, we’re dealing with very short time margins.”

Corporate Rate

Obama and congressional Republicans have previously shown interest in lowering the 35 percent corporate tax rate and curtailing breaks. Neither side has offered a complete plan, and they disagree on how low the rate can go and how to tax income that U.S.-based multinational companies earn overseas.

The inclusion of corporate taxes makes explicit assumptions by lawmakers in both parties that any tax overhaul would address both individual and corporate taxes, in part because so much business income is taxed on owners’ individual returns.

Boehner spokesman Brendan Buck called the White House’s willingness to include corporate taxes “a red herring.”

“We’ve always said you need to do both, given the way they interact,” Buck said in an e-mail. “The issue is the individual rates because of the small business jobs impact.”

Senator Max Baucus, who as chairman of the Finance Committee has jurisdiction over the tax code and entitlement programs, said selling a deal to lawmakers would become more difficult depending on how large it is and how late it arrives.

“The bigger it is, more difficult,” the Montana Democrat said.

Because Obama and Boehner are their party’s effective leaders, their endorsement of any agreement will carry weight with rank-and-file lawmakers.

Given the time constraints and political pressures, the one-on-one talks are “probably the only way to do it,” said Senator Lindsey Graham, a South Carolina Republican.

Trusting Boehner

“I really trust John Boehner,” Graham said. “It’s all about the House. It’s not about the Senate. We know how this movie ends in the Senate. We don’t know how it ends in the House.”

That doesn’t mean they can automatically count on votes from within their own parties.

Senator Jeff Sessions, an Alabama Republican, told reporters that the negotiations need to be subject to “more open discussion” from other lawmakers. “I have great respect for the speaker and all -- but he doesn’t have my proxy,” he said.

Private Deal

Senator Sheldon Whitehouse, a Rhode Island Democrat, said he and others in the party are concerned that a private deal between Obama and Boehner would prevent the full expiration of tax cuts on top earners, raise the Medicare eligibility age and change cost-of-living adjustment for Social Security benefits.

“So we wait and see,” he said. “And we try to also make sure that we use whatever resources we have to try to convince the White House that they defend those middle-class interests.”

Senator Richard Shelby, an Alabama Republican first elected in 1986, said he was concerned about a tax increase, though he understood why the negotiations are private.

In the end, he said, “you either vote for it or against it.”

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Kathleen Hunter in Washington at khunter9@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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