Obama Still Hopeful for Debt Accord With Republicans

The White House said Monday that a "significant" deal with Republicans on cutting government spending and raising the nation's debt limit is still possible, even as the administration hardened its stance on the need for increased tax revenue to be part of any agreement.

Lester Lefkowitz | Stone | Getty Images

President Barack Obama made his first direct foray into the deficit negotiations Monday.

He met with Senate Majority Leader Harry Reid in the Oval Office for about 30 minutes Monday morning, and planned to meet with Republican Sen. Mitch McConnell in the early evening.

White House spokesman Jay Carney said Obama's meeting with Reid was "constructive" and the president concluded that there are still opportunities for a deal to be reached.

But he said the only way to achieve that objective would be to include tax increases or the elimination of tax breaks for big companies and wealthy individuals.

"It's the only way to get it done," Carney said.

The White House has proposed raising about $600 billion in new tax revenue, including ending subsidies to oil and gas companies, an idea that failed in the Senate.

The administration also would tax private equity or hedge fund managers at higher income tax rates instead of lower capital gains rates, change the depreciation formula on corporate jets and limit itemized deductions for wealthy taxpayers. It also has called for repealing a tax benefit for an inventory accounting practice used by many manufacturers.

But Republicans are demanding huge cuts in government spending and insisting there be no tax increases.

Ahead of his meeting with Obama, McConnell said Democrats' calls for tax increases do not amount to a "serious" position.

"It is my hope that the president will take those off the table today so that we can have a serious discussion about our country's economic future," McConnell wrote in an editorial that appeared Monday on CNN.com.

Absent an agreement that cuts long-term deficits, Republicans say.

Talks broke down last week over Democrats' demands to include tax-revenue raising steps alongside spending cuts in order to beat an Aug. 2 deadline to lift the $14.3 trillion borrowing limit.

Failure to act risks a devastating U.S. debt default that could push the country back into recession.

But Obama must also ease public concern over his handling of the deficit, which is likely to be a key topic as he seeks re-election next year.

Republican Senate leader Mitch McConnell, who meets Obama at 5 p.m. EDT, stuck firmly to his party's line that revenue-raising measures were off the table.

"The whole business of raising taxes, regardless of how you go about it, is something that this Congress is not likely to do," McConnell told ABC's "This Week" Sunday.

The debt ceiling needs to be raised by around $2.4 trillion to ensure that the government has enough money to keep functioning through the November 2012 election.

Republicans say they want spending cuts to equal any increase in the limit, but the administration is pushing for a package that also includes revenues.

Obama favors $3 dollars in spending cuts for every extra dollar in revenue. Obama will meet at 10:30 a.m. EDT with Senate Democratic leader Harry Reid to explore what Democrats could live with.

But the president spelled out in his weekly address on Saturday that the United States could not "cut our way to prosperity", and this message was repeated by senior Democratic lawmakers, who adamantly deny that raising revenue equals increasing taxes.

Define a Tax Increase

"We want to close those loopholes up. We do not want to raise anybody's tax rates. That's never been on the table," said Democratic Representative Jim Clyburn.

Democrats are aiming at tax subsidies for oil and gas companies, so-called carried interest tax break for hedge fund managers, and loopholes that favor private corporate jets.

But the president has also backed limiting tax deductions for wealthier Americans. The White House says this targets millionaires and billionaires.

But Republicans warn it would also hit hundreds of thousands of small business owners, and say the problem is too much government spending, not insufficient taxes.

The U.S. federal deficit stands at $1.4 trillion, among the highest levels relative to the economy since World War Two.

The administration wants to frame the debate as Republicans protecting tax breaks for the rich at the expense of older Americans, while cuts in spending must also include the Defense Department budget that Republicans traditionally protect.

"Any package of any significance that passes is going to have to have significant spending reductions, including reductions in Pentagon spending.

You are going to have some of these tax loopholes for the wealthy and special interests closed," said a senior administration official.

Democrats lost control of the U.S. House of Representatives to Republicans in congressional elections last year — in part because of voter anger over the deficit — but they still control the U.S. Senate.

"To get anything through the House you are probably going to need some Democratic votes, and to get it through the Senate you are going to need a lot of Democratic votes.

So you need a package that can attract support from both parties in both chambers," the official said.