President Barack Obama's insistence on higher taxes for topearners and Republicans' refusal to raise rates leaves negotiatorswith arithmetically complex and politically fraught choices.

Tax questions will be central today when Obama holds his firstface-to-face conversation with House Speaker John Boehner since theNov. 6 election. At the White House meeting on the so-called fiscalcliff, Obama also will host House Minority Leader Nancy Pelosi, aCalifornia Democrat, Senate Majority Leader Harry Reid, a NevadaDemocrat, and Senate Minority Leader Mitch McConnell, a KentuckyRepublican.

As they try to find a solution both sides can accept, some movesthat ease the math complicate the politics. Republicans opposehigher rates while limits on tax breaks generate opposition frominterest groups that rely on them, including nonprofitorganizations, the home-building industry and residents of high-taxstates.

“To get serious revenue, you have to go after the stuff that'sbig,” said Alan Viard, resident scholar at the American EnterpriseInstitute, which favors limited government. “By definition, thestuff that's really big are the things that people are reallyusing.”

The $607 billion fiscal cliff is the combination of taxincreases and spending cuts that will take effect in January ifCongress doesn't act. Lawmakers of both parties want to avoid ashort-term shock to the economy while making progress on long- termdeficit reduction.

Obama and congressional Republicans — led by Boehner, an OhioRepublican — are in a standoff over how to address the fiscalcliff. The president supports higher taxes for top earners mixedwith some spending cuts.

Republicans want to extend expiring tax cuts for all incomelevels and are demanding an overhaul in 2013 of entitlementprograms and the tax code. House Ways and Means Chairman Dave Campof Michigan said in a speech prepared for the Tax Foundation lastnight that his committee will pass a tax overhaul plan in 2013 “nomatter what.”

Treasury 10-year note yields traded yesterday in the narrowestrange in six weeks. Yields were little changed at 1.59 percent at4:59 p.m. New York time, according to Bloomberg Bond Trader prices.The Standard & Poor's 500 Index fell 0.2 percent to 1,353.32 at4 p.m. in New York, the lowest level since July 25.

2011 Negotiations

Today's meeting features the same actors who failed to reachagreement in 2011. It won't be the start of back-to-back meetings.Obama leaves for Asia tomorrow and Congress is departing Washingtonuntil Nov. 26 for a Thanksgiving recess.

Boehner and Obama, who tried to reach a deficit-reduction dealin 2011, will resume their negotiations with the election behindthem and with markets reacting to their comments and tone. Sincethe election, they have each expressed a willingness to worktogether.

They have left an opening for a potential compromise on deficitreduction. Still, with 46 days until the Dec. 31 deadline, thereare dozens of moving parts — on taxes, spending and congressionalprocess — and plenty of obstacles.

A significant issue is a lack of agreement on how much deficitreduction the negotiators want to achieve and how much of thatshould come from taxes.

Obama wants $1.6 trillion in higher taxes for top earners overthe next decade, achieved through a combination of limits on breaksand higher tax rates on ordinary income, capital gains, dividendsand estates.

Trying to replace the entire $1.6 trillion by curbing tax breakswould be very difficult, Viard said, echoing the problems thatRepublican presidential candidate Mitt Romney had in making his taxproposals add up.

McConnell described the $1.6 trillion figure as a “joke” on theSenate floor yesterday.

“If the president's got an open mind, maybe he'll see thatRepublicans are the ones who've expressed a willingness to step outof our comfort zone if it actually leads to solution,” he said.

A smaller target would make it easier to design a limit on taxbreaks that could achieve the goal, be politically acceptable andstick to Obama's pledge of avoiding higher taxes for Americans withincomes of less than $200,000 a year for individuals or $250,000for married couples.

Itemized Deductions

For example, capping itemized deductions at $50,000 would raise$749 billion over the next decade, according to the nonpartisan TaxPolicy Center. That would drop to $490 billion if charitablecontributions don't count toward the cap.

That cap, unlike Obama's budget, would apply to more than thetop 2 percent of taxpayers. Considering the version that doesn'ttouch charitable contributions, 72.5 percent of the higher taxeswould be paid by people with incomes exceeding $1 million a year.About 10 percent, though, would be paid by people with incomesbelow $200,000.

Obama's $1.6 trillion goal already includes almost $750 billionfrom limits on tax breaks. Most of that, or $584 billion, comesfrom requiring people in the highest tax brackets to take theirdeductions and exclusions as if they were in the 28 percentbracket.

Limits on tax breaks would spur lobbying from affected groupsand objections from lawmakers whose constituents would bedisproportionately affected.

“It's not like all itemized deductions are necessarily createdequal,” Viard said.

Charitable contributions are the most discretionary fortaxpayers. Many taxpayers would reach a cap on deductions withstate and local taxes and mortgage interest, effectivelyeliminating any tax incentive for charitable giving, said SteveTaylor, senior vice president for public policy at United WayWorldwide in Alexandria, Virginia.

“The proposals that are being talked about now could really havea potentially dramatic, if not devastating impact on the charitablesector,” he said.

The more stringent the tax-break limit, the more it operateslike a hidden marginal rate increase, said Daniel Shaviro, a taxlaw professor at New York University.

Unless taxes on investment income are raised, he said, limits ontax breaks have the biggest effect on people with incomes closer to$250,000. The benefits of tax breaks for health insurance and homemortgage interest are smaller in comparison with the highestearners' income.

'Come Out Ahead'

“The guys at the top, they're going to come out ahead, unlessthey were being very generous to charity,” Shaviro said.

Even with the tricky math and opposing positions, there are somesigns that the sides are moving closer together.

Republicans, who have long objected to higher taxes, havestarted moving rhetorically toward accepting the idea of pairingspending cuts with tax increases.

They haven't been clear about what they would accept.Republicans are also insisting on major changes to entitlementprograms. They haven't put tax increases before their own members,many of whom were re-elected Nov. 6 on a promise not to raisetaxes.

Representative Steve King, an Iowa Republican, said Boehnercould probably get a revenue package through the House that curbsdeductions and credits for the highest earners and slightly raisesrates above the current 35 percent level, as long as it falls shortof the 39.6 percent that Obama wants.

“It may not have to be the 39-and-a-half percent number, itcould be something less than that; if he can squeeze a little moremoney out of it by closing loopholes I think he'll make that deal,”King said of the president.

While it “will be tough” to get through the House, “it doesn'tmean it won't get through the House,” King said. “There might beenough pressure could come on John Boehner that more votes comefrom Democrats than Republicans.”

It's unclear how far Boehner can go on new revenue. He and Obamatentatively agreed to $800 billion in 2011. They didn't finalizethe deal and Boehner didn't bring it to a vote.

While insisting on higher taxes, Obama has shown some opennessin recent days. He and Treasury Secretary Timothy F. Geithner saidrates must increase without specifying that the top rate mustreturn to the 39.6 percent level in effect when President BillClinton left office.

Clinton-Era Levels

At the same time, Obama and other Democrats say the mathwouldn't add up in an approach that relied only on reducing taxbreaks, and some congressional Democrats say they want the toprates to revert to the Clinton-era levels.

Boehner told reporters Nov. 14, “There are ways to put revenueon the table without increasing tax rates,” though he wouldn'tdiscuss specifics.

Representative Chris Van Hollen, the top Democrat on the HouseBudget Committee, noted that Obama's 2010 fiscal commission startedwith the assumption that the top rates would return to 36 and 39.6percent.

“We're saying, 'Show us your math,'” Van Hollen said in aninterview yesterday. “It's hard to get there unless you start at arate of 39 percent.”

Some Republicans see reason for optimism about an agreementbased on the president's remarks.

“I'm optimistic that the president left some room to negotiate,”said Senator Roy Blunt, a Missouri Republican.

Some say this is another chance at a budget deal. Former NewHampshire Senator Judd Gregg, a Republican and co-chairman of theCampaign to Fix the Debt, a non-partisan group urging deficitreduction, called this a “super opportunity” because “everybody'scards are on the table.”

“The best way to resolve this whole thing would be for thepresident and speaker to sit down in a room by themselves and tellthe staff to leave and draft out the parameters of the deal,” saidGregg, while acknowledging that such a circumstance isunlikely.

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