Tax cuts: Obama wants a deal

By Jeanne Sahadi, senior writer


NEW YORK (CNNMoney.com) -- A door opened this week to resolving one of Washington's most divisive money issues: the Bush tax cuts.

The White House indicated more than once that President Obama would be willing to negotiate with Republicans to ensure the tax cuts remain in place on Jan. 1.

"How that negotiation works itself out, I think it's too early to say. But, you know, this is going to be one of my top priorities," Obama said during a press conference Wednesday. (7 key money issues facing the lame-duck Congress)

For months the president had been saying that he only wanted the cuts extended permanently on income up to $250,000 for married couples and $200,000 for single filers. Under his original proposal, the portion of the cuts that apply to income over $250,000 would expire after Dec. 31.

Republicans, meanwhile, have been pushing for a permanent extension of the cuts for everyone regardless of income.

On Thursday, White House spokesman Robert Gibbs indicated that the president "would be open" to discussing the option of extending the cuts for upper-income families for up to two years.

And in his weekly address on Saturday, the president stated his preferred parameters: "One: middle-class families need permanent tax relief. And two: I believe we can't afford to borrow and spend another $700 billion on permanent tax cuts for millionaires and billionaires."

Push to protect economy

The president has called Democratic and Republican Congressional leaders for a meeting on Nov. 18 to discuss the economic agenda, with tax cuts taking center stage.

Both parties have expressed concern that raising taxes on the majority of Americans in the next year would harm the economic recovery.

"[M]y hope ... is that given [that] we all have an interest in growing the economy and encouraging job growth that we're not going to play brinkmanship but instead we're going to act responsibly," Obama said during his press conference.

The president also may have indicated what he'd like from Republicans in exchange for his negotiating on high-income tax cuts.

To help the economy, Obama said, it was important not only to keep middle-class taxes low and to extend a host of business tax breaks that regularly get renewed, but "to extend unemployment insurance because there are still a lot of folks out there hurting."

The program to extend federal unemployment benefits expires on Nov. 30.

Earlier this year, some Republicans opposed a previous extension and others argued it should be paid for.

The look of compromise

So what kind of tax-cut extension could both parties live with?

Two Washington tax policy analysts -- Clint Stretch of Deloitte Tax and Anne Mathias of MF Global's Washington Research Group -- believe the most likely compromise will be a temporary extension for everyone for one or two years.

Mathias believes Obama "will not veto a bill that extends them for all."

Stretch said that a temporary extension for all carries less political risk for Republicans than other scenarios floated, such as a permanent extension for the middle-class but a temporary one for the rich.

"If the Republicans really care about high-income taxpayers, they can't let them get separated from the middle class," Stretch said.

Democrats, meanwhile, can frame a temporary extension as a way to give everyone time to figure out how to slow growth in the U.S. debt, much like what House Majority Leader Steny Hoyer suggested this summer, Stretch said.

In June, Hoyer made news when he said Congress needed "to have a serious discussion" about whether the country can afford a permanent extension "before we have a real plan for long-term deficit reduction."

The Treasury Department estimates that making the tax cuts permanent for all income below $250,000 would cost $3 trillion over a decade; making them permanent for upper-income households would cost $700 billion.

Deficit hawks have been arguing that making any of the tax cuts permanent will make it infinitely harder to put the federal budget back on track.

Mathias estimates that a one-year extension for everyone will cost between $250 billion and $350 billion.

While both parties will likely end up bending, the president's decision to publicly open the door to negotiations is no guarantee that lawmakers will close the deal by year-end.

"Compromise was to be expected and is not signal of a deal. We still consider it more likely than not that no deal is struck before January, said Sean West, a U.S. policy analyst at Eurasia Group.

- CNN's Suzanne Malveaux contributed to this report. To top of page

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