Last updated: November 15, 2012 11:34 pm

Obama hints at tax rate flexibility

Barack Obama is offering some flexibility on tax rates as he prepares to meet with congressional leaders in the first round of high-stakes negotiations to avert the fiscal cliff and prevent a recession in the world’s largest economy next year.

Mr Obama and White House officials have long insisted that income tax levels for the wealthiest Americans should rise from 35 per cent to 39.6 per cent in any deficit reduction agreement, bringing them back to levels under President Bill Clinton.

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But there has been a subtle shift in their stance as they head into the opening White House summit with congressional leaders on Friday to stop the US from suffering a budgetary contraction worth $600bn next year, known as the fiscal cliff.

The White House is still adamant that high-earners should pay higher tax rates – while those for the middle-class should remain at current levels – a central message in Mr Obama’s re-election campaign and a big bone of contention with Republicans.

But administration officials are not drawing any red lines around the details of those rate hikes.

“If the Republican counterparts or some Democrats have a great idea for us to raise revenue, maintain progressivity, make sure the middle class isn’t getting hit, reduces our deficit, encourages growth, I’m not going to just slam the door in their face,” Mr Obama said during his press conference on Wednesday.

Potentially, this could open the door to a compromise on that would put the top tax rate somewhere above 35 per cent but below 39.6 per cent. It could mean that the Obama administration and Democrats would be prepared to shift their definition of “middle class” from the current threshold of $250,000 in annual income to a higher level, such as $500,000 or even $1m.

Even in the face of such concessions, Republicans may balk. In the wake of Mr Obama’s re-election victory last week, party leaders have indicated that they are open to offering some additional revenue, as Mr Obama is demanding. But they want it to come from limiting deductions, rather than raising Bush-era income tax rates for the rich in any form.

“This can and should be done without increasing tax rates – because doing so would hurt small businesses in America,” said a spokesman for John Boehner, the Republican speaker of the House of Representatives.

In depth: US fiscal cliff

The White House and Congressional leaders are embarking on high-stakes talks to avoid a looming fiscal cliff

Mitch McConnell, the top Republican in the Senate, said on Thursday that it was a good sign that Mr Obama said he was open to new ideas. But Mr McConnell warned: “What we won’t do is raise tax rates . . . What we won’t do is embrace a tax policy that disincentives saving and work. What we won’t do is agree to revenue in exchange for reforms we know won’t materialise.”

A critical factor is whether Mr Obama is ready to limit his overall target for revenue, which in his latest budget proposal was $1.6tn for a deficit reduction package worth $4tn, with the rest coming from spending cuts.

Gene Sperling, Mr Obama’s top economic adviser, said a large deal could be reached with “well over a $1tn in revenues” – indicating some wiggle room there.

A smaller revenue target would make it easier to strike a deal with less aggressive tax hikes on the wealthy, whether through smaller rate increases or curbs to tax deductions, or a combination of the two.

But even so, the White House is sceptical that there are any easy alternatives to the full tax rate increase for the wealthy.

They fear middle class taxpayers – or the bulk of Americans earning less than $250,000 per year – may have to make up for the lost money in addition to being most damaged by accompanying spending reductions.

“The math has to add up,” said Jay Carney, White House press secretary. “[Mr Obama] will not accept a proposal that has some vague promise of revenues produced from closing loopholes and limiting deductions from the wealthy that is coupled with very concrete burdens placed on the middle class and seniors.”

In Mr Obama’s budget, more than $800bn in revenue came from raising tax rates on the wealthy, so if less money came from that bucket there would have to be deeper limits to tax deductions for the rich, or new curbs on business tax breaks in order to avoid touching the middle class.

Substantially higher tax rates on investment income such as capital gains and dividends might also have to be contemplated – which many on Capitol Hill might find unpalatable.

“If the Republicans aren’t going to do that then the only way to get the revenue is by letting the rates go up,” says Michael Linden, policy analyst at the liberal Center for American Progress.

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