Bush tax cuts: Obama seeks compromise

NEW YORK (CNNMoney.com) -- A day after Republicans won control of the House of Representatives, President Obama said that he is willing to negotiate to ensure the Bush tax cuts are extended for the middle class by 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)

The president had been saying publicly 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 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.

Both parties have expressed concern that raising taxes on the majority of Americans 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.

A few key Democrats -- such as Senate Budget Chairman Kent Conrad -- have said they could support extending the tax cuts temporarily for upper-income households. Others, including Senate Banking Chairman Christopher Dodd, have called for pushing the $250,000 threshold higher.

So what could both parties live with?

Two Washington tax policy analysts -- Clint Stretch of Deloitte Tax LLP 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 the cost of making the tax cuts permanent for all income below $250,000 would cost $3 trillion over a decade; the cost of making them permanent for upper-income households would cost $700 billion over the same period.

Deficit hawks have been arguing that making any of the tax cuts permanent will make it infinitely harder to ever put the federal budget back on a more sustainable track -- a stated goal of all parties.

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