Republican Defectors Weigh Deal on Tax-Rate Increase

House Speaker John Boehner is under pressure to defy Republican Party orthodoxy on income taxes to rein in the U.S. deficit, with an increasing number of his rank-and-file members saying they’re willing to discuss raising rates for top earners.

A few dozen Republicans have joined a bipartisan call to consider “all options” on taxes and entitlement programs, signaling they are ready to bargain on President Barack Obama’s main condition for a budget deal this month: a tax rate increase for the top 2 percent of U.S. earners.

Obama and Boehner spoke by telephone yesterday, said Boehner spokesman Michael Steel, after offering their proposals in the past week to cut the deficit, which has topped $1 trillion in each of Obama’s four years in office. More than $600 billion in tax increases and federal spending cuts will start taking effect in January unless Congress acts.

“We’re at a fork in the road,” said former New Hampshire Senator Judd Gregg, a Republican. Obama and Boehner need to realize “they have to get in a room and work out a deal,” he said, or positions will “start to harden and both sides to some degree are going to be willing to accept going over the cliff.”

Lawmakers of both parties must move from their ideological corners, and that is best done behind closed doors, said Senate Budget Committee Chairman Kent Conrad of North Dakota, a Democrat.

‘Back and Forth’

“I’m not certain that volleying back and forth publicly is the way to resolve this,” Conrad said. “Everything’s on the table now, which needed to happen.”

Boehner, an Ohio Republican, proposed a $2.2 trillion plan this week that would raise revenue by curbing tax breaks. He insists he won’t agree to higher tax rates at any income level.

While Obama opposes Republicans’ approach to generating revenue solely by limiting tax breaks, his budget proposal in February included more than $750 billion in revenue from top earners by curtailing tax breaks. His new deficit-cutting plan would raise $1.6 trillion in tax revenue over the next decade.

Treasury Secretary Timothy Geithner said in an interview on CNBC yesterday that the administration “absolutely” is willing to go over the so-called fiscal cliff of tax increases and spending cuts if Republicans don’t agree to raise tax rates on the highest-income earners.

No Sign

Representative Peter Roskam of Illinois, the chief deputy whip for House Republicans, didn’t rule out a trade on rate increases and entitlement cuts, though he said the president has shown no sign he is willing to give.

“It’s the zero-sum-game politic that concerns me,” Roskam said at a Bloomberg News breakfast today. “There is a Lucy and Charlie Brown feeling here with the football, and House Republicans are not willing to let Lucy pull the ball back.”

Appearing today on NBC’s “Today” program, former Wyoming Senator Alan Simpson decried the political “stupidity” of the current situation, saying Republicans and Democrats should stop speculating as to which party would be harmed more if no agreement is reached. “That’s like betting your country,” he said. “There’s stupidity in that. This is big-time stuff.”

Simpson, the Republican co-chairman of the president’s 2010 deficit commission, said the odds are “probably pretty real” that Obama is prepared to take the U.S. over the cliff if taxes on the wealthy aren’t raised.

Cutting Spending

“You can’t get to where we need to go by cutting spending. That won’t cut it. You’re going to destroy the fragile economy,” Simpson said. “You have to have a blend” of increased taxes and reduced spending.

Stocks were little changed today. The Standard & Poor’s 500 Index added less than 0.1 percent to 1,409.91 at 9:52 a.m. New York time. The Dow Jones Industrial Average rose 11.53 points, or 0.1 percent, to 13,046.02. Treasury 10-year note yields approached a two-week low, falling one basis point, or 0.01 percentage point, to 1.58 percent at 8:33 a.m. New York time, according to Bloomberg Bond Trader data.

Boehner’s once-unified coalition against income tax rate increases is showing signs of fracture. A Republican leader of the petition to consider all revenue options, Representative Mike Simpson of Idaho, said he could accept higher tax rates for married couples earning more than $500,000 a year, in exchange for an overhaul of spending in entitlement programs.

Separately, more House Republicans began to endorse Oklahoma Republican Tom Cole’s call to extend all tax cuts for middle-class earners, as Obama has asked Congress to do by the end of the year. Representative Kay Granger of Texas called it “just the right thing to do.”

Middle Class

Florida Representative Dennis Ross, a freshman Republican, said he wouldn’t rule out voting for Senate-passed legislation to extend only the middle-class tax cuts.

“I don’t think at this juncture you rule anything out,” Ross said.

Passing legislation now to extend middle-class tax cuts and delaying the debate over a broader deficit-cutting plan into 2012 may have political advantages for Republicans. It would deny Obama the additional spending on infrastructure and a payroll tax-cut extension he is seeking.

It also would delay the deficit debate until the U.S. needs to raise the $16.4 trillion debt limit early next year. The debt-ceiling deadline provided Republicans with leverage over Democrats during the 2011 budget talks.

Pressure Points

“Republicans have a series of pressure points,” said Grover Norquist, president of Americans for Tax Reform, whose anti-tax-increase pledge was signed by many Republican lawmakers. “Republicans are a lot smarter, older, wiser than two years ago,” he said at a Bloomberg Government event yesterday. “If you said you want your debt ceiling, here is what we’re going to insist on.”

A trade-off of higher taxes for entitlement spending cuts would require Boehner, an Ohio Republican, to persuade more than 100 of his majority party members to join House Democrats in passing a deal.

Representative Steve LaTourette of Ohio said Boehner could gather the 218 votes needed to send a tax increase to the Democratic-majority Senate if about 120 House Democrats “buy in” on changes to entitlement programs, such as raising the eligibility age for Medicare or adjusting the annual Social Security cost-of-living formula.

LaTourette is among the Republicans circulating the letter to put all options on the table. So far about 80 members of Congress have signed, half of them Republican and half Democratic, according to Simpson spokeswoman Nikki Watts.

‘Sane People’

While it may be an unpalatable trade for both sides, said Simpson, “There’s enough sane people left to get it done.”

Aides to Boehner and House Majority Leader Eric Cantor of Virginia are playing down the number of Republicans willing to defect on tax rates. Publicly, the speaker has given no indication he’ll change his position.

The effort shows that Republicans’ unified position on income tax increases is splintering since the Nov. 6 election, which gave Obama a second term and increased Democratic ranks in the Senate and House.

Last week, Cole was the first high-profile Republican to say his party should lock in the 2001 and 2003 income tax cuts for 98 percent of Americans by the end of the year and allow them to expire for the top 2 percent of earners. Other Republicans began nodding in agreement.

“I would gladly accept some rate increase if some spending reduction was locked in, but the White House is not addressing any of that,” said Representative Brian Bilbray, a California Republican, who is retiring at the end of this Congress.

Income Threshold

A potential tax compromise may include raising Obama’s $250,000 annual income threshold to $500,000 or $1 million, or raising rates for top earners short of the 39.6 percent level during President Bill Clinton’s administration, Simpson said. That could be combined with ending or capping some deductions and credits that has support in both parties, he said.

Democrats would need to respond by agreeing to cuts in entitlement programs. Options include an increase in the Medicare eligibility age, changing the way Social Security cost-of-living payments are calculated and trimming benefits or increasing co-payments for wealthier recipients.

Obama, in a Dec. 4 interview with Bloomberg Television, didn’t rule out any of these alternatives. “I don’t expect Republicans to agree to any plan where they’re just betting on the come that entitlement reform will happen,” he said.