Debt Talks: The Grand Bargain

Jul 7, 2011 8:13am

ABC News’ Jonathan Karl (@jonkarl) reports:

President Obama and Speaker John Boehner have been discussing a grand bargain to cut some $4 trillion in projected budget deficits over the next 10 to 12 years, according to officials familiar with the talks.

There is no deal yet, but the ideas under consideration include reductions in spending on the big three entitlement programs:  Social Security, Medicare and Medicaid.  That would be a huge concession for Democrats.  In return, Republicans would agree to close some big tax loopholes, reducing some deductions and other so-called spending in the tax code as part of a tax reform deal that would also lower corporate tax rates.  The net effect of that tax reform plan would be an increase in tax revenue.

As one senior administration official told me:  “We need to do something unthinkable on entitlements.  They need to do something unthinkable on taxes.”

Another White House official acknowledged that Democrats won’t like the proposed reductions in Social Security and Medicare (an understatement), but that the changes would be modest compared to what Republicans have proposed in the Paul Ryan budget plan.

“We’ll never agree to anything close to the GOP plan to voucherize Medicare,” said one White House official. 

Among the spending reductions the president and the speaker have discussed is reducing the annual cost of living increase (COLA) for Social Security and Medicare as well as increasing the level of income subject to the Social Security FICA tax (the tax currently applies to an individual’s first $106,800 of income).

As for the tax changes, a top Republican official says that while they are discussing closing tax loopholes and other changes to increase tax revenues, there is still a red line for Republicans when it comes to tax rates:  “The Speaker has never offered to let any of the Bush tax cuts expire.”

The big question:  Even if Obama and Boehner can strike a deal, will it fly with other Congressional leaders?

Senior Congressional Republicans said this morning that they are doubtful that anything that looks like a tax increase can pass the House – or even gain the support of others in the Republican leadership.  And Democrats from Harry Reid and Nancy Pelosi on down have said they would oppose anything that cuts Medicare or Social Security benefits.   

In other words:  a deal that both raises tax revenues and cuts entitlements may be exactly what needs to be done to deal with the deficit, and it may also be impossible to pass in Congress.

UPDATE FROM ABC NEWS' ANN COMPTON (@AnnCompton): “The President has always said everything should be on the table,” deputy communications director Jen Psaki told ABC News this morning in an interview in her office down the hall from the Oval Office.

Psaki would not give specifics of any presidential offers on the table as talks move to a higher level, but she did say the President is ready to put his hand on entitlements often called the dangerous “third rail” of politics.

“We wish there was an easy solution to bringing down the deficit and doing it in a responsible way but unfortunately, there isn't.” Psaki said. “That’s why we need to go after some of the  sacred cows in politics, things  like entitlement reform,  areas like changing the tax code. That’s a conversation the president is willing to have and he hopeful the Republicans will come to the table willing to have it, as well.”

Psaki was careful not to yield on the president’s hope to raise taxes for the wealthiest income tax bracket.

“We’re not talking about raising taxes on middle class families or working people here. We are talking about areas in tax code; corporate taxes is a good example.” She targeted tax subsidies.

“Oil and gas companies are right now taxed at a rate of nine percent. Companies that are out there building factories, hiring people to work in them,  are taxed at a rate of 30 percent. So we feel there are areas that are low hanging fruit in the tax code  we can go after first.”

The White House calls today’s talks “a pivotal time” in the negotiations and officials do not expected to cinch a deal today.

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