Obama makes new offer on 'fiscal cliff' - USA TODAY

President Obama has softened his demand for higher taxes at upper income levels.(Photo: Carolyn Kaster, AP)

Story Highlights

Obama has softened his demand for higher taxes at upper income levels
President is now seeking a higher tax rate beginning at incomes over $400,000
New offer closed the gap between Obama and Boehner considerably

WASHINGTON (AP) — Narrowing a "fiscal cliff" negotiating gap, President Barack Obama is backing off what had once been ironclad positions.

A new proposal handed to House Speaker John Boehner on Monday drops Obama's long-held insistence that taxes rise on individuals earning more than $200,000 and families making more than $250,000. He is now offering a new threshold of $400,000 and lowering his 10-year tax revenue goals from the $1.6 trillion he had argued for a few weeks ago.

Obama also abandoned his demand for permanent borrowing authority. Instead, he is now asking for a new debt limit that would last two years, putting its renewal beyond the politics of a 2014 midterm election.

And in a move sure to create heartburn among some congressional Democrats, Obama is proposing lower cost-of-living increases for Social Security beneficiaries, employing an inflation index that would have far-reaching consequences, including pushing more people into higher income tax brackets.

Those changes, as well as Obama's decision not to seek an extension of a temporary payroll tax cut, would force higher tax payments on the middle class, a wide swath of the population that Obama has repeatedly said he wanted to protect from tax increases.

The concessions signal a new stage in the negotiations, where posturing has given way to pragmatism and where both sides still seem willing to lock in on a substantial agreement rather than just putting off a fiscal day of reckoning. To that end, Obama has conceded that a big bargain would require giving up some of his proposals.

"I understand that I don't expect the Republicans simply to adopt my budget," he said during his post-election news conference last month. "That's not realistic. So, I recognize we're going to have to compromise."

The talks, facing a looming deadline, seek to avoid across-the-board tax hikes for nearly all wage-earners as well as spending cuts at the Pentagon and in domestic programs that are set to kick in at the start of the new year. Economists inside and outside the government have warned that the combination of the two — the "fiscal cliff" — could stall a weak recovery and threaten a new recession.

Obama's steps toward Boehner came after the House speaker took a plunge in a call to Obama on Friday — while the nation was focused on the horror of a mass murder in Newtown, Conn. — and agreed to accept an increase in tax rates for taxpayers who earn more than $1 million. Boehner's plan would raise about $1 trillion in taxes over 10 years.

That was a barrier-breaking moment, changing the negotiations from a fundamental debate over whether tax rates should rise at all to quibbling over who should pay them.

There are still plenty of disputes to iron out. And people familiar with Obama's proposal were careful not to describe it as his final offer.

The Obama plan says it is seeking $1.2 trillion in revenue over 10 years and $1.2 trillion in 10-year spending reductions. Boehner aides say the revenue is closer to $1.3 trillion if one counts the revenue triggered by the new inflation index, and they say the spending reductions are closer to $930 billion if one discounts about $290 billion in lower estimated debt interest.

"Any movement away from the unrealistic offers the President has made previously is a step in the right direction," Boehner spokesman Brendan Buck said. "But a proposal that includes $1.3 trillion in revenue for only $930 billion in spending cuts cannot be considered balanced."

Either way, though, there is no doubt Obama has moved in Boehner's direction after Boehner opened the door to a tax rate increase.

Obama's plan, like Boehner's, would also raise taxes on dividends and capital gains from 15 percent to 20 percent. Both would also reduce the number of deductions and exemptions that wealthy taxpayers can claim. Obama's proposal also would let estate taxes revert to 55 percent on estates after allowance for a $1 million exemption.

In making his offer, Obama stiff-armed Republican demands to increase the eligibility age for Medicare from 65 to 67, a goal Democrats strongly reject. He also sought to contain cuts in Medicare and other health care programs to about $400 billion over 10 years, less than what Republicans want. And he is continuing to seek spending on unemployment assistance and on public works projects.

Obama's willingness to reduce future cost-of-living increases in Social Security would also mean smaller annual increases in government pensions and veterans' benefits. Annual adjustments to income tax brackets would be smaller, pushing more people into higher tax brackets.

Over time, because annual adjustments to the poverty level would be smaller, the new index could reduce the number of people eligible for programs such as Medicaid, Head Start, food stamps, school lunches and home heating assistance.

To avoid some of that risk, Obama wants lower-income recipients to receive protection against any loss from scaling back future cost-of-living increases, people familiar with his plan said.

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