Even With Boehner's Bold Offer, Fiscal-Cliff Gaps Remain

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By Paula Dwyer

As risky compromise offers often do, the Republican proposal came late on Friday, with much of Washington's attention fixed on the Newtown massacre. House Speaker John Boehner, in a phone call to President Barack Obama, proposed a major breakthrough in the fiscal-cliff negotiations. It could finally end the deadlock with Democrats.

Boehner's offer would move the fiscal talks forward first and foremost by raising $1 trillion in tax revenue over 10 years -- up from the $800 billion he previously proposed -- and largely from tax-rate increases on income over $1 million. The offer would cut about $1 trillion from entitlements such as Medicare but also from other domestic programs. And it would extend the debt ceiling an entire year.

It's difficult to overestimate how significant the proposal is, and how much Boehner is risking politically.

For the first time, the speaker is formally offering to end his party's opposition to tax-rate increases. He is also taking the U.S.'s borrowing limit -- a negotiating card Republicans hoped to play if they didn't get what they wanted in the deficit talks -- off the table for an entire year. And he is willing to look for entitlement savings not by raising the Medicare eligibility age but by changing the formula for calculating cost-of-living increases and other less-painful changes for beneficiaries.

It's noteworthy that the two sides finally are talking about how to split their differences. Even more important, the speaker no longer demagogues about job creators and small-business owners who would be hurt by a rate increase on top earners. By agreeing to limit higher rates (they would go to 36 percent and 39.6 percent, up from 33 percent and 35 percent, respectively) to incomes of $1 million or more, only the truly rich, and hardly any small businesses, would be hit.

The speaker, in addition, no longer insists that new revenue be found only by limiting deductions and closing loopholes, although some tax breaks will have to disappear to reach the $1 trillion target for new revenue.

With those big concessions, the remaining pieces of the puzzle should fall into place quickly. But this is Washington, so let's not get too far ahead of ourselves.

The two sides remain apart on how much tax revenue must come out of the negotiations. Obama has lowered his initial demand to $1.4 trillion from $1.6 trillion, and some Democrats have hinted that the president would settle for the same $1.2 trillion he demanded in the summer of 2011 when he and Boehner last tried to cut a deal. That means the two sides only need to find $200 billion to close the revenue gap.

The president also seeks higher taxes on income from capital gains and dividends and an increase in the estate tax. Republicans remain steadfastly against all three.

Other differences remain, including Obama's insistence on an extension of expiring unemployment benefits. And Republicans continue to demand more in spending cuts than Democrats would like.

The president had earlier agreed to $600 billion in savings over 10 years from domestic programs ($400 billion from entitlements and $200 billion elsewhere). Boehner, though, wants twice that amount ($600 billion from health-care programs and $600 billion elsewhere).

Assuming the White House can convince Democrats to accept more cuts to Medicare, and that Boehner can keep his party from revolting, the truly hard work will come next year. Lawmakers must rewrite the tax code and reform entitlement programs to fill in the details on the agreement that postpones $600 billion in automatic tax increases and spending cuts due to hit Jan. 1.

It's a tall order. But the speaker's weekend proposal broke the logjam. Now it's up to the president to keep the momentum going.

(Paula Dwyer is a member of the Bloomberg View editorial board. Follow her on Twitter.)

Read more breaking commentary from Bloomberg View at the Ticker.

-0- Dec/17/2012 18:07 GMT