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

The two sides remain hundreds of billions of dollars apart ontaxes and spending, and they continue to disagree on whether ayear-end deal should include an increase in the debt limit andfresh programs to boost the economy. Obama and Boehner spoke bytelephone yesterday, according to a Republican congressional aideand an administration official.

Obama's latest offer better reflects the upper boundary of taxrevenue Democrats could support. His budget plan earlier this yearhad more than $200 billion in tax increases on dividends andestates that couldn't get through the Democratic-controlledSenate.

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

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

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

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

Republicans sent Obama a fresh proposal yesterday in response toan offer Obama made Dec. 10, said Michael Steel, a spokesman forBoehner who didn't provide details about the Republican plan.

Obama dropped his revenue demand to $1.4 trillion from $1.6trillion, said a Republican congressional aide who spoke oncondition of anonymity to discuss the private offer. Republicansstill have an $800 billion revenue target, party aides said.

The president's plan also would include a corporate taxoverhaul, according to an official familiar with the negotiationswho wasn't authorized to describe them publicly and asked to not benamed.

Difficult Choices

Sixty-five percent of Americans say Obama's Nov. 6 electionvictory gave him a mandate on his proposal to raise tax rates ontop earners, according to a Bloomberg National Poll of 1,000 adultsconducted Dec. 7-10.

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

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

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

“Right now the American people have to be scratching their headsand wondering: When is the president going to get serious?” Boehnersaid on the House floor in his first remarks since his direct talkswith Obama resumed Dec. 9.

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

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

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 actuallysaves a lot of money,” he told ABC. “But what I've said is let'slook at every avenue, because what is true is we need to strengthenSocial Security, we need to strengthen Medicare for futuregenerations.”

The Congressional Budget Office has said a stalemate probablywould lead to a recession in the first half of 2013. Obama andBoehner are trying to replace the immediate deficit reduction withgradual tax and spending changes.

Treasury Yield

The Standard & Poor's 500 Index climbed 0.7 percent to1,427.84 at market close in New York yesterday, after rallying asmuch as 1.1 percent earlier. The Dow Jones Industrial Average added78.56 points, or 0.6 percent, to 13,248.44.

The benchmark 10-year note yield increased one basis point, or0.01 percentage point, to 1.67 percent, the most since Nov. 27, at8:14 a.m. today in New York, according to Bloomberg Bond Traderprices.

Each day that passes without a deal increases the pressure onlawmakers to act quickly if Boehner and Obama reach agreement. Thatcould saddle Democrats with entitlement cuts such as a change inthe formula for calculating cost-of-living benefit adjustments oran increase in the Medicare eligibility age. Republicans worry theywill be asked to endorse the higher tax rates for top earners Obamais demanding.

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

Obama and congressional Republicans have previously showninterest in lowering the 35 percent corporate tax rate andcurtailing breaks. Neither side has offered a complete plan, andthey disagree on how low the rate can go and how to tax income thatU.S.-based multinational companies earn overseas.

The inclusion of corporate taxes makes explicit assumptions bylawmakers in both parties that any tax overhaul would address bothindividual and corporate taxes, in part because so much businessincome is taxed on owners' individual returns.

Boehner spokesman Brendan Buck called the White House'swillingness to include corporate taxes “a red herring.”

“We've always said you need to do both, given the way theyinteract,” Buck said in an e-mail. “The issue is the individualrates because of the small business jobs impact.”

Senator Max Baucus, who as chairman of the Finance Committee hasjurisdiction over the tax code and entitlement programs, saidselling a deal to lawmakers would become more difficult dependingon how large it is and how late it arrives.

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

Rank-and-File Lawmakers

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

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

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

That doesn't mean they can automatically count on votes fromwithin their own parties.

Senator Jeff Sessions, an Alabama Republican, told reportersthat 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.

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

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

Senator Richard Shelby, an Alabama Republican first elected in1986, said he was concerned about a tax increase, though heunderstood why the negotiations are private.

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

Bloomberg News

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