Obama, Boehner again prepare to tackle debt

House Speaker John A. Boehner (Getty Images)

With another dangerous deadline for the economy approaching, Tuesday's election returned to power the same men who have battled for two years over the nation's budget problems: President Barack Obama and House Speaker John A. Boehner.

The president and the most powerful Republican in Washington hold the keys to any deal to tame the national debt. And as they prepare to go another round, the political winds have shifted in Obama's favor.

Where the voters of 2010 wanted to block Obama's agenda, the voters of 2012 gave him a second term, as well as Democratic reinforcements in the House and the Senate. Chastened Republican leaders have lined up behind Boehner to offer a compromise on taxes, until now a major stumbling block. And triumphant Democrats are demanding even more concessions — although former top White House aides say the president recognizes that he must not overplay his hand.

On Thursday, hopes were high that Obama and Boehner would be able to break the two-year stalemate and reach a year-end agreement to replace nearly $500 billion in automatic tax increases and budget cuts that economists warn would knock the nation back into recession.

Questions remain about Boehner's ability to rally his fractious caucus — still packed with strong-willed conservatives — behind a deal that would increase federal tax revenue and about Obama's ability to persuade Democrats to bend on their key priorities, such as preserving Medicare and other entitlement benefits and raising tax rates for the wealthy.

Boehner warned Thursday that higher tax rates couldn't win House approval. But in an interview with ABC "World News" anchor Diane Sawyer, he said, "I'm the most reasonable, responsible person here in Washington. The president knows it. He knows that he and I can work together. The election's over. Now it's time to get to work."

Obama is scheduled to respond in a statement Friday "about the action we need to take to keep our economy growing and reduce our deficit," White House officials said.

In Boehner's view, aides said, the starting point should be the deficit-reduction deal that he and Obama were close to sealing in secret talks during the summer of 2011. With Congress locked in a bitter battle over the federal debt limit, the two tentatively agreed to slice $2.4 trillion from future borrowing by trimming Medicare and Social Security benefits and generating $800 billion in new revenue by overhauling the tax code.

Under the terms of the emerging agreement, the rewrite would reduce the top tax rate paid by the highest earners from the current 35 percent, although a precise target was not specified. In return, Republicans agreed to drop demands to preserve preferential rates for investment income such as capital gains and dividends — by far the most lucrative break in the tax code for the very wealthy.

Details were never nailed down, however, and one of the sticking points remains relevant: Although Democrats wanted to increase the tab for taxpayers by $800 billion, Republicans wanted at least some of the money to come from economic growth, which they argue would result from a simplified tax code with lower rates.

On Thursday, Sen. Charles E. Schumer, D-N.Y., dismissed the idea that tax cuts lead to higher tax revenue as "a Rumpelstiltskin fairy tale. You may remember Rumpelstiltskin was the fairy tale figure who turned straw into gold."

Still, Schumer said, "I was heartened, very heartened, by the tone that Speaker Boehner showed" in a post-election speech Wednesday. "It makes me very hopeful we can do something big in the next month and a half."

Aides say Boehner's leadership team is united in his bid for a compromise, including House Majority Leader Eric Cantor, R-Va., and House Budget Committee Chairman Paul Ryan, R-Wis., who is due to return to the House after serving as Mitt Romney's vice presidential running mate.

Cantor and Ryan are champions of the right wing, and both were highly skeptical of Boehner's efforts to bargain with Obama in 2011, months after the tea-party wave helped them take control of the House. Cantor aide Brad Dayspring said the political environment has changed dramatically since then.

"The mandate of the 2010 election was to act as a check on President Obama's radical agenda, and the mandate of 2012 is for both sides to work together to avert the fiscal cliff and support economic growth," Dayspring said. "In two months, taxes are set to go up on everyone, and Republicans are working to avert that in a fiscally responsible way."

Obama approaches the fiscal cliff negotiations claiming a mandate on tax policy. Nearly half of voters supported his pledge to raise rates for the wealthy, according to exit polls, and the White House has been quick to assert that the electoral outcome validates its position.

Key Democrats, including Schumer, are urging Obama to stand firm and let the top rate rise to 39.6 percent when the George W. Bush-era tax cuts expire on Dec. 31. On Thursday, the nonpartisan Congressional Budget Office said the move would cause minimal harm to the economy, destroying only 200,000 jobs — not the 700,000 Republicans claim.

White House officials have declined to say whether Obama could be persuaded to return to his 2011 offer to lower tax rates for the wealthy through an overhaul that raises revenue other ways.

On entitlements, Obama has offered significant changes to Medicare, including letting the eligibility age to rise from 65 to 67. He has also supported applying a less generous measure of inflation to Social Security benefits. But he took fire from liberals for those concessions, and he dropped them from his latest budget request.

Powerful interest groups such as the AFL-CIO and the AARP are campaigning against the return of those provisions in negotiations over the fiscal cliff. Among their allies is Senate Majority Leader Harry M. Reid, D-Nev., who bluntly declared Wednesday, "We're not messing with Social Security."

But William Daley, Obama's former chief of staff, said the president must be prepared to offer some concessions to get a deal.

"I don't think you can just stick with the plan [Republicans] rejected and hope they change their mind," Daley said in an interview. "I think they start with the outline from a year and a half ago. It would be easy going back to that deal, which we got fairly close to doing."

Obama's brain trust is largely the same as it was during the 2011 fight. It includes Vice President Joe Biden, who is likely to play an important role in negotiations because of his close ties to the Senate and his good relationship with Senate Minority Leader Mitch McConnell, R-Ky.

Other key figures include Chief of Staff Jack Lew; economic advisers Gene Sperling and Jason Furman; and Rob Nabors, the White House's liaison to Congress.

Treasury Secretary Timothy F. Geithner has developed healthy relationships with many Republicans. But he has said that he will step down as soon as fiscal cliff negotiations wrap up, raising doubts about his effectiveness.

Lew's name has surfaced as a possible replacement for Geithner. Lew is a budget expert and has strong relations with Democrats, but Republicans found him difficult to negotiate with during the 2011 talks. At one point, Boehner told Obama that he couldn't work with Lew, and demanded instead to deal with Geithner and Daley.