By Lori Montgomery
Washington Post Staff Writer
Saturday, November 13, 2010; A02
With tax breaks for millions of Americans set to expire Dec. 31, President Obama has opened the door to a compromise with Republicans, signaling a new willingness to accept tax breaks for the wealthy to avoid immediate tax increases across the board.
But as lawmakers head back to town next week for their first battle since this month's congressional elections, no one is sure how far Obama is willing to go.
In recent days, the White House has appeared to vacillate on the expiring tax cuts, swerving from a humble tone of capitulation back to one of defiance.
On Wednesday, White House senior adviser David Axelrod seemed to suggest that Obama was poised to acquiesce to GOP demands to extend all the tax cuts in tandem, telling the Huffington Post, "We have to deal with the world as we find it."
On Friday, Obama pushed back, telling reporters with him in South Korea that "that is the wrong interpretation."
"Here's the right interpretation: I want to make sure that taxes don't go up for middle-class families starting on January 1," Obama said. "That's my number-one priority for those families and for our economy."
Obama's remarks moved the debate back to square one of the post-election era: He is willing to break his campaign promise to eliminate tax breaks that benefit the wealthy, administration officials said, but only for a year or two or three. He wants to "decouple" the cuts for the upper-brackets from the middle-class cuts by extending the two sets of provisions for different periods of time. But he does not want to play a game of legislative chicken that risks letting all the cuts expire.
The problem is that Republicans vehemently oppose decoupling, calling it a nonstarter that would lead inexorably to higher taxes on the wealthy. So across Washington, lawmakers, anti-tax mavens and liberal activists are wondering: What will Obama do when push comes to shove?
"Where's the president going to draw the line? What's he going to stand up and fight for?" asked Robert Borosage, president of the liberal Institute for America's Future.
The stakes are enormous. Millions of taxpayers could see hundreds of dollars sliced from their paychecks in January unless Congress acts. Economists say expiration of the tax cuts would deal a devastating blow to the fragile U.S. economy, and has the potential to push it back into recession.
In the days after the election, that cold reality appeared to have overtaken the harsh rhetoric of the campaign trail. A consensus was quietly emerging on taxes, with key lawmakers and senior aides saying both parties were preparing to accept a temporary extension of all the cuts to defuse a brutal, drawn-out fight.
Obama gave ground on the upper-income cuts. Senior Republicans, including Senate Minority Leader Mitch McConnell (R-Ky.), said they would be willing to give up their demand that all the tax cuts be made permanent - a budget buster that would add nearly $4 trillion to deficits over the next decade, according to congressional budget analysts.
But then the ground started shifting. House Minority Leader John A. Boehner (R-Ohio) backed away from a September offer to support a two-year extension, saying he would push for a permanent extension of all the tax cuts.
Then came Axelrod's remark, which outraged liberals and prompted White House assurances that no compromise was in the works - a message that served to stiffen Democrats' resolve.
Aides said House Speaker Nancy Pelosi (D-Calif.), who is running for reelection as leader of a smaller, more-liberal caucus, is also reluctant to give in quickly. Liberal activists are pressing her to stage a vote on a bill that extends the middle-class cuts and lets the upper-income provisions lapse, daring Republicans to vote against it.
In the Senate, Sen. Max Baucus (D-Mont.), chairman of the tax-writing Finance Committee, has prepared legislation that would extend only the middle-class cuts, a measure some Democrats view as an opening bid. Numerous senators are floating ideas for how to craft a compromise, including redefining the middle class as those earning less than $1 million a year instead of those earning less than $250,000.
One idea gaining attention is a proposal from Sen. Mark Warner (D-Va.) to let the cuts for the rich lapse and replace them with $65 billion worth of targeted tax cuts for business. Instead of being shaped in Washington, the tax cuts would be designed by business leaders.
"That would be a wonderful short-term incentive to get them to move cash off the sidelines" and into the struggling economy, Warner said in an interview.
Obama is set to sit down with Republican and Democratic leaders next week to begin charting the path forward. The pressure on all sides to avoid an impasse is intense.
"It's to everybody's benefit politically to reach some accord," said Sen. Saxby Chambliss (R-Ga.), who leads a bipartisan group of senators working to forge agreement on deficit reduction and other economic issues. "I don't think there's any representative that wants to go home over Christmas and look their constituents in the eye and say: 'I wouldn't agree to extend the tax package, and I'm part of the reason why your taxes are going up.'â"