Congressional Republicans are offering a deficit-reductionsolution to newly re-elected President Barack Obama: Let'snegotiate in good faith and all agree on our pre-electionproposal.

House Speaker John Boehner, who returned to the role of partystandard-bearer following Republican presidential nominee MittRomney's election loss, told reporters yesterday that Republicansare “willing to accept new revenue under the right conditions.” Hecited ideas Democrats already have rejected: restructuringentitlement programs and relying on revenue generated by economicgrowth from a tax-code overhaul.

Boehner is avoiding breaking with Republican positions withoutspecifying what concessions he might make in negotiations withObama, said Alex Brill, a research fellow at the AmericanEnterprise Institute, a Washington group that favors smallergovernment.

“They're choosing their words carefully so as to preserve theiroptions,” said Brill, a former aide to Republicans on the HouseWays and Means Committee. “He can't be coming out today and sayingsomething that will be perceived as a reversal or contrary to somelong-held views.”

The parties remain divided on what the top tax rate should beand on whether fresh revenue should come from tax increases or onlyfrom economic growth.

The Senate's top Republican, Mitch McConnell of Kentucky, saidyesterday in a statement that Republicans, who failed to gaincontrol of the Senate, will meet Obama “halfway” indeficit-reduction talks because Democrats need “to move to thepolitical center, which is where the work gets done in a dividedgovernment.”

The comments from Republican leaders marked the start ofpolitical positioning and negotiations over what to do about theso-called fiscal cliff, a combination of automatic spendingreductions and expiring tax cuts that amounts to $607 billion in2013.

Lawmakers in both parties say they want to avoid therecession-causing cliff, though each side is warning that it's theother party's intransigence that must end.

Former Republican aide Eric Ueland said Boehner's comments,which effectively called for reopening the deficit talks that heand Obama had in 2011, were “a reflection of the practical reality”that financial markets were looking for answers from Washington and“you can't let things drift.”

Deficit Negotiations

U.S. stocks tumbled yesterday, with the Dow Jones IndustrialAverage falling 312.95 points, or 2.4 percent, to 12,932.73 in itsbiggest drop since Nov. 9, 2011. Treasuries rallied, pushing10-year note yields down by the most since May, on concern thatlawmakers won't agree to defer the mandated spending cuts and taxincreases, slowing the economy. The Dollar Index, which measuresthe greenback against six major trading partners, rose to atwo-month high.

Until now, investors had been complacent about the impendingfiscal cliff. An improving jobs market, a recovery in housing andgains in consumer confidence have boosted stocks and alleviatedconcern about the credit quality of U.S. government debt. Even withyesterday's moves, the Standard & Poor's 500 Index is up almost11 percent in 2012 and 10-year Treasury yields, at 1.65 percent,are below the average over the past decade of 3.69 percent.

“At least from the congressional Republican end of things, theyare going to move as quickly as they can and as fully as they canto be as clear as they can about what they want on the fiscal andtax policy side,” Ueland, who was chief of staff to former SenatorBill Frist when the Tennessee Republican was majority leader, saidin an interview.

A Senate Democratic aide said that while Boehner's statedopenness to revenue was promising, the details he mentioned —notably so-called dynamic scoring that would let Congress rely onrevenue generated by the tax plan — weren't sufficient. The aidewasn't authorized to speak publicly about talks between partyleaders.

The big question for Boehner is “how far is he willing to go” toreach a deal with Obama and the Democrats, said Alan Abramowitz, apolitical science professor at Emory University in Atlanta.

“Boehner is still going to be under a lot of pressure from theright wing,” Abramowitz said. “It is going to be interesting to seehow he handles that in negotiations with the president on thedeficit and the fiscal cliff.”

'Right Formula'

Republicans haven't altered their tax policy stance because theycontinue to believe it's right, said Representative Kevin Brady, aTexas Republican and member of the tax-writing Ways and MeansCommittee.

“We've always felt this was the right formula for both gettingthe deficit under control and growing the economy,” Brady said inan interview yesterday. “Fundamental tax reform, coupled withaddressing the entitlement issues, could be an awfully strong step,an awfully strong signal to the market, that they can invest withconfidence again.”

Brady said he thought that the idea of gaining additionalrevenue through economic growth was the common ground between theparties, and that Boehner and House Republicans were in sync.Republicans will also, as they did in 2010, point to continuedeconomic weakness as a reason to avoid tax increases.

“This economy is flying so low and slow,” Brady said.“Turbulence from this fiscal cliff could send it into the groundand that makes no sense, for either party for any reason.”

Business leaders are impatient for some sort of deficitagreement to reduce the uncertainty affecting the economy, saidJohn Engler, president of the Business Roundtable, aWashington-based group of chief executives.

“The committee chairs don't change, the leadership doesn'tchange, so what's the reason to delay? You know all the issues.Start making decisions,” said Engler, a former Republican governorof Michigan.

Fitch Ratings warned that the U.S. may be downgraded next yearunless lawmakers avoid the fiscal cliff and raise the debt ceilingin a timely manner, while Moody's Investors Service said it willwait to see the economic effects if the nation experiences a fiscalshock.

Senate Majority Leader Harry Reid, a Nevada Democrat, pledged touse the chamber's expanded Democratic majority to push for a“balanced approach” to reaching an agreement.

Top Earners

Obama's re-election and Republicans' failed bid to take over theSenate majority showed that voters want higher taxes for topearners, Reid told reporters yesterday.

“The vast majority of American people — rich, poor, everybody —agrees: That the rich, the richest of the rich, have to help alittle,” Reid said in Washington.

The majority leader offered to work with Republicans to reachconsensus, saying he had a “pleasant conversation” with Boehneryesterday morning.

Democrats are “not going to mess with Social Security” as partof revisions to entitlement programs Republicans are seeking inexchange for revenue, Reid said, adding, “We're happy to deal withentitlements.”

Reid said he would oppose changes to the way benefit increasesare calculated on an annual basis, an idea that had been discussedin previous bipartisan talks.

Vice President Joe Biden said the administration is prepared towork with the Republican leadership on “the two overarchingproblems right now,” the tax increases and automatic spending cutsscheduled to begin in January.

“There's all kinds of potential to be able to reach a rational,principled compromise,” Biden told reporters traveling on his planeyesterday.

Representative Peter Roskam, an Illinois Republican on thetax-writing Ways and Means Committee, pointed to Democratic dividesover the income threshold at which tax increases should take effectand put it in contrast with the “clarity” among Republicans. “Thearea of common ground is you say, look, there's an opportunity toget more revenue to close these gaps,” he said in an interview.“But we believe that the revenue comes from growth.”

Boehner said negotiations between the parties should be held toavert the tax increases and spending cuts and that he would seekconcessions from Obama.

“The president must be willing to reduce spending and shore upentitlement programs that are the primary drivers of our debt,” hesaid.

Obama has called for higher tax rates for individuals makingmore than $200,000 a year and married couples making more than$250,000. Boehner emphasized Republican opposition to raisingincome tax rates.

Bloomberg News

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