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Fiscal cliff: Impasse on tax rates is big hurdle

Associated Press Modified: November 8, 2012 at 5:32 pm •  Published: November 8, 2012

The current assumption is that any agreement would be a multi-step process that would begin this year with a down payment on the deficit and on action to stave off more than the tax increases and $109 billion in across-the-board cuts to the Pentagon budget and a variety of domestic programs next year.

The initial round is likely to set binding targets on revenue levels and spending cuts, but the details would probably be enacted next year.

"What we can do is avert the cliff in a manner that serves as a down payment on — and a catalyst for — major solutions, enacted in 2013, that begin to solve the problem," Boehner said.

While some of that heavy work would be left for next year, a raft of tough decisions would have to be made in the next six weeks. They could include the overall amount of deficit savings and achieving agreement on how much would come from revenue increases and how much would be cut from costly health care programs, the Pentagon and the day-to-day operating budgets of domestic Cabinet agencies.

Democrats are sure to press for a guarantee that tax reform doesn't end up hurting middle-income taxpayers at the expense of upper-bracket earners. Republicans want to press for corporate tax reform and a guarantee that the top rate paid by individuals and small businesses goes down along the way.

While some Democratic partisans want Obama to play tough on taxes and use his leverage to force Republicans to accept higher rates on the wealthy, Republicans warn that such hardball would poison the well even before Obama takes the oath of office and imperil prospects for second-term Obama initiatives including immigration reform.

Another idea is to raise revenue from the wealthy but not through higher income tax rates. Instead, policymakers could cap the amount of itemized deductions that the wealthy might be able to claim, an idea that's in Obama's budget and was a suggestion of Mitt Romney in the campaign.

"There is more than one way to bell the cat. So why are people so fixed on the 39.6 (percent rate)? It's because of the progressivity of the code," said Sen. Kent Conrad, D-N.D., on CNBC on Thursday. "You can accomplish that same progressivity with lower rates if you broaden the (tax) base in a way that's progressive."

Other items on the agenda for the lame duck session include a multi-year farm bill, legislation to reform the Postal Service, and a renewal of Medicare payment rates for doctors.