Obama makes 'fiscal cliff' offer. Are contours of a deal emerging?

In fiscal cliff negotiations, President Obama is now proposing that tax hikes could begin with households earning $400,000, not the $250,000 that he has long called for.

With time running out to reach a deal on the "fiscal cliff," President Obama softened his bargaining stance by moving closer to Republicans on taxes and Social Security.

The president's latest position is that tax hikes on wealthy Americans could begin with households earning $400,000, not the $250,000 that he has long called for. He also signaled willingness to support a new way of measuring inflation when calculating yearly cost-of-living increases in Social Security benefits.

Mr. Obama's offer, as summarized in news reports Tuesday morning, also includes backing away from a call for the executive branch to have permanent borrowing authority in an era of chronic deficits. Instead, he is now seeking a deal that raises the US debt limit high enough that it would not need to be revisited by Congress until after the 2014 midterm elections.

His proposals stir strong opposition from some members of his own party, who hoped for a firmer stand on high-income tax hikes and for stiff resistance to a new inflation gauge for entitlement benefits (a move that would also reduce annual increases in pensions for military veterans and federal retirees).

And, by itself, the Obama offer doesn't move the bargaining into its final stage. House Republican leaders promptly said Obama's moves haven't gone far enough.

"Not there yet" is how House Speaker John Boehner described the state of play Tuesday morning. "We do not have a balanced plan" when the president is proposing $1.3 trillion in tax hikes and $850 billion in net spending reductions over the next decade, he said.

Still, with each step that the two parties take toward each other, the potential for a fiscal agreement draws nearer. Both sides agree that the fiscal cliff – tax hikes and spending cuts scheduled for Jan. 1 – represents a severe and unneeded shock to consumer activity, which could push the nation into recession. So the two sides have continued to negotiate, with the goal of finding a way to reduce future deficits without doing much near-term harm to a fragile economy.

Obama's offer follows concessions by Speaker Boehner, who on Friday opened the door to letting tax rates for wealthy Americans revert to Clinton-era levels. Boehner said the tax hike should affect households with incomes above $1 million.

The parameters of a deal may have begun to emerge in recent days. Republicans, with an eye on polls showing a majority of Americans in Obama's camp on tax hikes for the rich, have started to bend toward allowing Bush-era tax rates to expire for many of America's wealthiest taxpayers. The new revenue would be matched by a still-to-be-agreed-upon level of spending cuts.

And near-term legislation could be paired with a pledge by both sides to take further steps next year, perhaps including efforts on tax reform or restraining Medicare costs. Taken together, the steps would aim to curb a rising federal debt and reassure investors that the US economy rests on a solid fiscal foundation.

The Obama camp has characterized its plan as $1.2 trillion in new tax revenue over 10 years and an equal amount of spending reductions.

Republicans crunch the numbers differently, in part because of the Obama proposal on inflation adjustments. Adopting a so-called chained consumer price index (CPI) would affect not only benefits such as Social Security or government pensions, but also the way that tax brackets adjust from year to year.

The chained CPI system would push more US taxpayers into higher brackets, over time, than would occur under the current way of measuring inflation. Republicans say that means some additional tax revenue that Obama hasn't counted. They also quibble with the president's spending numbers.

Many economists believe the chained CPI approach is a more accurate way of measuring changes in inflation, or the cost of living. But the new index could reduce the number of people eligible for antipoverty programs such as Medicaid, food stamps, and home heating assistance. Obama wants to shield lower-income recipients from the impact of an inflation change, The Associated Press reported, citing people familiar with his plan.

Many liberals oppose the idea of patching up Social Security's finances by shifting to the chained CPI.

"If news reports are correct and the White House is considering this benefit cut, then President Obama has broken faith with seniors and his commitment to keep Social Security out of the deficit debate," Max Richtman, president of the National Committee to Preserve Social Security & Medicare, said in a statement released Tuesday. "The chained CPI would mean an immediate benefit cut of $130 per year for the typical 65-year-old retiree and would grow exponentially to a $1,400 cut after 30 years of retirement."

Jared Bernstein, a former Obama administration economist now at the liberal Center on Budget and Policy Priorities (CBPP), takes a more nuanced view on the inflation gauge.

In a recent blog post, he says the chained CPI is a more accurate price index, but the switch isn't a simple call. "It would constitute a benefit cut, and one that would really accumulate for older seniors. For this reason, my CBPP colleagues ... argue for a benefit bump-up in the program for the older elderly."

White House spokesman Jay Carney issued a statement Tuesday, after Boehner said House Republicans are preparing to vote for an interim bill to prevent big tax hikes, in case the bipartisan talks fail.

Mr. Carney said Boehner's "Plan B" can't pass the Senate. But he added that "the parameters of a deal are clear" and that "the president is hopeful that both sides can work out remaining differences and reach a solution so we don’t miss the opportunity in front of us today."