WASHINGTON -- House Speaker John Boehner's latest offer to President Barack Obama to allow tax rates to rise on incomes over $1 million has already changed the terms of negotiations to avert a fiscal crisis in January, and both sides expressed new optimism Sunday that a deal could be reached this week.
In a phone call with Mr. Obama on Friday, the speaker, who had resolutely opposed allowing income tax rates to rise on anyone, instead spoke in terms of preventing taxes from rising on everyone with yearly incomes below $1 million. He also said he could accept an agreement that would raise $1 trillion in new revenues over 10 years if the president committed to significant savings from benefit programs like Medicare, according to people familiar with the talks.
That is up from $800 billion in Mr. Boehner's initial offer. Mr. Obama has lowered his revenue demand from $1.6 trillion over 10 years to $1.4 trillion, and some Democrats have said his bottom line is $1.2 trillion. Even so, administration officials characterized the speaker's overture as a sign of progress.
With Friday's exchange, the president and the speaker put aside their philosophical argument over whether higher tax rates would hurt "small businesses" and "job creators" and began wrangling only over price. While Republicans with knowledge of the talks said a deal was not imminent, they indicated that it was close. "We are hopeful," one of the officials familiar with the talks said Sunday.
No deal is certain. The parties are far apart on possible changes to benefit programs, especially Medicare, and new tax revenues that must be locked in right away through higher tax rates rather than later through an uncertain tax reform effort.
Democrats were hostile Sunday.
"The reported offer by Speaker Boehner on tax rates would lose almost three-quarters of the revenue that could be gained by ending the Bush tax cuts for households with incomes over $250,000," said Rep. Sander Levin of Michigan, the ranking Democrat on the House Ways and Means Committee. And that number does matter. The president and the speaker are $400 billion apart on the amount their proposals would instruct Congress' tax-writing committees to raise when the hard work of overhauling the tax code begins next year.
The sides are farther apart on the amount of spending that should be cut. The White House has said it wants the relevant congressional committees to find $400 billion in savings from federal health care programs like Medicare, Medicaid and Mr. Obama's health care law over 10 years, and about $200 billion in other cuts. Republicans want $600 billion in savings from health care programs over 10 years and $600 billion in other cuts, none of them detailed yet.
The officials familiar with the talks said this weekend that Mr. Boehner wants Mr. Obama to agree to move the government to a different way of calculating inflation that would slow the growth rate of many programs, chiefly Social Security, by slightly lowering cost-of-living adjustments. It would also raise additional revenues because tax brackets, which rise each year with inflation, would rise more slowly. Rising incomes would more quickly push people into higher tax brackets.
But the officials said Mr. Boehner was willing to drop discussions of an immediate increase in the eligibility age for Medicare, to 67 from 65, recognizing the fierce opposition to that change among Democrats.
Mr. Boehner crafted his proposal on tax rates as a counterargument to a growing number of Republicans who have publicly said the party should quickly pass legislation to extend expiring tax rates for incomes below $250,000. Advocates of that position said it would keep taxes from going up Jan. 1 for 98 percent of households.
But Mr. Boehner argued that the proposal, still being pushed by Mr. Obama, would allow the top two income tax rates to increase to 39.6 percent and 36 percent, from 35 percent and 33 percent, to capture people who could arguably call themselves upper middle class. By pressing for a limit of $1 million of income, only the top rate and a handful of the super-rich would be impacted, and virtually no legitimate small businesses would feel the hit.
The president's plan -- which also would include higher tax rates on capital gains, dividends, and inherited estates -- would raise $960 billion over 10 years. Congressional tax experts estimated Sunday that a 39.6 percent rate on incomes over $1 million would raise $269.3 billion over 10 years. If limits on tax deductions and credits for high-income families that were repealed in the 2001 tax cut are allowed to return, that figure would top $300 billion.
The officials said that would be enough to justify canceling spending cuts that are set to take effect Jan. 2 and would allow Congress to start on a tax-code overhaul that would create a new set of tax rates, possibly beginning in 2014. Closing loopholes and curtailing deductions and credits would raise most of the $1 trillion in revenues Mr. Boehner has offered, they say.
But Republicans have yet to show how tax writers can get from $300 billion in revenues through one higher tax rate to $1 trillion, and many tax experts have said it could be impossible without cutting back tax breaks for the middle class as well as for those with high incomes.