(Bloomberg News) House Speaker John Boehner said he offered a "framework" including new revenue to reduce the U.S. budget deficit in his first face-to-face talks today with President Barack Obama and top Congress leaders since the Nov. 6 election.
As both sides expressed optimism that a deal is possible, U.S. equity markets rose.
Boehner also said he is serious about including revenue in an agreement if accompanied by significant spending cuts. The framework is "consistent with the president's call for a fair and balanced approach," he said after what he called a "constructive" meeting with the president and other congressional leaders in the Roosevelt Room at the White House.
"We're prepared to put revenue on the table, provided we fix the real problems," including entitlement costs, said Senate Republican leader Mitch McConnell of Kentucky.
"The president and the leadership had a constructive meeting and agreed to do everything possible to find a solution that averts the so-called fiscal cliff," White House Press Secretary Jay Carney said in a statement after the meeting.
The $607 billion fiscal cliff is a combination of tax increases and spending cuts that will take effect in January if Congress doesn't act. Lawmakers of both parties want to avoid a short-term shock to the economy while making progress on long- term deficit reduction.
"We feel very comfortable with each other, and this isn't something that we're going to wait until the last minute" to get done, said Senate Majority Leader Harry Reid, a Nevada Democrat. The leaders will meet again with Obama the week after Thanksgiving, he said.
As the White House talks wrapped up today, U.S. stocks rose. The Standard & Poor's 500 Index rose as much as 1 percent after leaders emerged from the meeting. The index was up less than 1 percent to 1358 at 1:11 p.m. in New York after closing yesterday at its lowest level since July 25. The S&P 500 had lost almost 6 percent since the election.
Treasuries rose, reflecting strong demand for U.S. debt worldwide, with 10-year note yields touching a 10-week low. The benchmark 10-year yield fell one basis point, or 0.01 percentage point, to 1.58 percent at 12:48 p.m. New York time, according to Bloomberg Bond Trader prices.
Despite the optimism, the starting points for both sides -- Obama's insistence on higher taxes for top earners and Republicans' refusal to raise rates -- leaves negotiators with arithmetically complex and politically fraught choices.
While tax questions will be central in the fiscal talks, the two sides also will consider a down payment on replacing automatic spending cuts should discussions on a broader plan fail, according to congressional aides.
Also in the meeting on the so-called fiscal cliff were Vice President Joe Biden, Treasury Secretary Timothy F. Geithner and White House Chief of Staff Jack Lew.
The president supports higher taxes for top earners mixed with some spending cuts. Republicans want to extend expiring tax cuts for all income levels and are demanding an overhaul in 2013 of entitlement programs and the tax code.
"My hope is that this is going to be the beginning of a fruitful process where we're able to come to an agreement that reduces our deficit in a balanced way, that we will deal with some of these long-term impediments to growth, and we're also going to be focusing on making sure that middle class families are able to get ahead," Obama said.
While insisting on taxes, Obama has shown some openness in recent days. He and Geithner said rates must increase without specifying that the top rate must return to the 39.6 percent level in effect when President Bill Clinton left office.
Democrats and some Republicans are also beginning to talk publicly about another alternative: a more modest increase in upper-income tax rates.
One idea would be to raise Obama's $250,000 income threshold for a tax increase to $500,000 or $1 million and increase the current 35 percent top rate to 37 percent, Peter Orszag, Obama's former director of the Office of Management and Budget, said today on Bloomberg Television.
"Will John Boehner really blow up a deal for a 1 percent point increase above $1 million?" Orszag said. "The administration has made it clear there has to be at least some increase in marginal tax rates."
Yesterday Representative Steve King, an Iowa Republican, said Boehner could probably get a revenue package through the House that curbs deductions and credits for the highest earners and slightly raises rates above the current 35 percent level, as long as it falls short of the 39.6 percent that Obama wants.
"It may not have to be the 39-and-a-half percent number, it could be something less than that; if he can squeeze a little more money out of it by closing loopholes I think he'll make that deal," King said of the president.
While it "will be tough" to get through the House, "it doesn't mean it won't get through the House," King said. "There might be enough pressure could come on John Boehner that more votes come from Democrats than Republicans."
Several congressional aides have suggested that in the event talks fail, both parties in Congress are discussing fallback plans for $60 billion to $100 billion in deficit reduction to replace automatic spending cuts set to take effect in January.
On taxes, the White House has signaled it is prepared to let all income tax rates expire at the end of the year if Republicans refuse to accept Obama's call to only expire rates for upper-income earners.
"We have to ensure that taxes do not go up on middle-class families," Obama said in his opening remarks today. "That is an agenda that Democrats and Republicans and Independents, people all across the country, can share."
Unlike in mid-2011, when talks between Obama and Boehner on a grand bargain collapsed, outside market and political forces are bearing down on lawmakers.
Credit ratings agencies including Moody's Investors Service have said additional credit downgrade could occur if talks fail, the nonpartisan Congressional Budget Office has warned of a recession in 2013, and Federal Reserve Chairman Ben Bernanke has said he has few options in his tool box should the U.S. suffer an economic shock.
Following a mid-2011 agreement to lift the nation's borrowing limit that contained $1.2 trillion in Republican- driven spending cuts, and an election where Democrats picked up seats in the House and Senate, the party says it's well positioned to secure a debt-reduction package weighted mostly toward revenue.
Political considerations in both chambers should incentivize lawmakers to move quickly on a deal on unpopular tax increases and spending cuts to entitlement programs, said David Walker, a former U.S. comptroller general.
"It's clear that Boehner wants a Grand Bargain and he doesn't want the Republicans to be viewed as obstructionists for the 2014 elections," he said. In the Senate, Democrats have a number of lawmakers who could face competitive races, like Mary Landrieu of Louisiana, who'll want to put space between their votes to overhaul entitlement programs and the next election, he said. "Those are political factors that cause you to have some hope," said Walker.
As they try to find a solution both sides can accept, some moves that ease the math complicate the politics.
Republicans oppose higher rates while the limits on tax breaks they prefer generate opposition from interest groups that rely on them, including nonprofit organizations, the home- building industry and residents of high-tax states.
"To get serious revenue, you have to go after the stuff that's big," said Alan Viard, resident scholar at the American Enterprise Institute, which favors limited government. "By definition, the stuff that's really big are the things that people are really using."
Obama wants $1.6 trillion in higher taxes for top earners over the next decade, achieved through a combination of limits on breaks and higher tax rates on ordinary income, capital gains, dividends and estates. McConnell described the $1.6 trillion figure as a "joke" on the Senate floor yesterday.
An important component of winning a revenue compromise from Republicans in the lame-duck session of Congress is a framework for a tax overhaul in 2013 that sets a revenue target and that ultimately lowers income tax rates for all Americans, according to interviews with Republicans and Democrats.
"It's an opportunity to deal with tax reform," said Ohio Senator Rob Portman, a Republican and former White House budget director. "I'm actually looking at the glass as half full."
The biggest question is how many votes of his Republican rank-and-file Boehner could lose to produce a revenue compromise in the House, where he oversees an "unstable majority" that's rejected spending bills and last year's debt ceiling increase, said Virginia Representative Gerry Connolly, a Democrat.
The meeting is " a check the box by the president for getting beat up by not talking to Republicans or congressional leaders for a long time," said Representative Pat Tiberi, an Ohio Republican.
"I wouldn't expect a lot of movement today," Orszag said. "That'll come after Thanksgiving."