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Dec 17, 2012, 01.02 PM IST | Source: Reuters

Boehner opens door to tax hikes to deal with fiscal cliff

US House of Representatives Speaker, John Boehner's offer to accept a tax rate increase for the wealthiest Americans knocks down a key Republican road block to a deal resolving the year-end "fiscal cliff."

Boehner opens door to tax hikes to deal with fiscal cliff

US House of Representatives Speaker, John Boehner's offer to accept a tax rate increase for the wealthiest Americans knocks down a key Republican road block to a deal resolving the year-end "fiscal cliff."

Also read: Wall St week ahead: Holiday 'on standby' due to cliff issue

The question now boils down to price - which income levels, what rates and what's offered in return. Such major questions, still unanswered so close to the end of the year suggest, however, that no surge toward an agreement is immminent.

With just over two weeks before the fiscal cliff's USD 600 billion in automatic tax hikes and spending cuts are triggered, threatening a new recession, there is little time to craft a comprehensive deal that will satisfy both Democrats and Republicans.

Until the latest offer, made on Friday, Boehner had insisted on extending all of the Bush era tax rates, resisting President Obama's demand to let the marginal rates rise on income above USD 250,000. A rising chorus of business executives also had urged Republicans to agree to this.

Although the White House has not accepted Boehner's gambit, which media reports have said includes a USD 1 million tax-hike threshold, it could push negotiations away from entrenched, ideological positions.

"Boehner has now accepted the premise of higher rates. So now we're just arguing over details. I think it's a significant step," said Greg Valliere, chief political strategist at Potomac Research Group.

A framework deal spelling out tax revenue and spending cut targets to be finalized in the new year could be possible, Valliere said.

"Boehner's offer to allow tax rates to go up for taxpayers earning over USD 1 million fundamentally transforms fiscal cliff negotiations," added Sean West, US policy analyst at Eurasia Group, a political risk consultancy.

In a note to clients, West wrote that it signals, significantly, that Boehner ultimately believes a deal to avoid the cliff is still possible.

"The political burden is now shifted back to the president, who must be willing to take on his party in order to get a deal Boehner can ultimately pass. We do not think the president will overreach: Obama will work with Boehner to get to a deal."

There are still several critical elements to a deal besides a tax rate increase on the wealthy, including Republican demands to cut spending on entitlements.

Changes to the expensive Medicare and Medicaid health care programs for the elderly and the poor could be central to any deal, which must also include an increase in the federal debt limit needed by the end of February.

Demands entitlement cuts

Boehner conditioned his tax rate increase offer on Obama agreeing to cuts in entitlement spending.

Many Republican lawmakers want to raise the eligibility age on Medicare from 65 to 67. They also want to add more means testing to Medicare, making wealthier retirees pay more for their care.

Currently, Medicare does have some means testing, charging higher premiums for coverage of doctors visits and prescription drugs to individuals earning more than USD 85,000 and married couples earning more than USD 170,000. Only about 5 percent of recipients pay these higher premiums.

Thus far, Obama has offered only about USD 400 billion in 10-year entitlement savings, mostly through small adjustments in reining in health care costs - not fundamental changes such as raising eligibility ages.

And just as Boehner faces opposition in his own party to raising any tax rates, Obama faces opposition to cuts to Medicare, Medicaid and Social Security from Democrats, who pledged in election campaigns they would protect these programs.

A major bloc of congressional Democrats has already signaled they will not accept major cutbacks in Medicare as part of any fiscal cliff deal.

House Minority Leader Nancy Pelosi of California and Maryland Representative Chris Van Hollen are among the high ranking Democrats in the House who in recent days have come out forcefully defending against raising the age for eligibility for Medicare from the current 65 to 67 years of age.

"Given the level of savings that is being talked about from Medicare, you can't get it all from providers and drug makers," said Paul Heldman, an analyst at Potomac Research, which tracks Washington policy for investors.

"So Opponents of raising the eligibility age have reason to believe beneficiaries will take some sort of hit if a mega-deal is cut," he said.

If Republicans are not successful in securing entitlement program cuts in exchange for a tax-rate increase on the wealthy, they are adamant about using a debt-limit increase as leverage to overhaul Social Security and Medicare.

The US Treasury expects to reach its USD 16.4 trillion statutory debt cap by year-end, and will exhaust its remaining borrowing capacity around mid-February, risking a potential default.

Louisiana Republican Representative John Fleming, a member of the conservative Tea Party caucus who has never voted to increase the debt ceiling, said he would support a debt limit hike if it were part of a deal to make Medicare and Social Security sustainable.

The pace of activity could pick up the coming week.

House Republicans were told to prepare for a possible weekend session next week, potentially interrupting travel plans for the long Christmas holiday weekend.

House Majority Leader Eric Cantor scheduled "possible legislation related to expiring provisions of law," a reference to the expiring tax cuts, for the end of the week, portending a weekend session. Cantor has said the House would meet through the Christmas holidays and beyond.

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