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Analysis: Obama has limits on debt deal

By Jessica Yellin, CNN Chief White House Correspondent
November 12, 2012 -- Updated 1609 GMT (0009 HKT)
STORY HIGHLIGHTS
  • President Barack Obama invites congressional leaders to White House for meeting next week
  • Obama and John Boehner discuss speaking carefully in public to leave room for a deal
  • Boehner has urged Obama to "lead" while opposing any tax increases in a deal
  • Deal must be reached by the new year to avoid tax increases, defense cuts

(CNN) -- After winning re-election, one of President Barack Obama's first moves was to call House Speaker John Boehner.

The two have rarely spoken since their "grand bargain" on debt reduction fell apart in the summer of 2011, but they will have to re-engage to implement tax and spending changes essential to avoiding the economic disaster Washington calls the "fiscal cliff."

According to Democratic and Republican sources, the call was courteous and short, and one source said the two men discussed the need to speak carefully in public to leave room to cut a deal in private.

Boehner spoke publicly on Wednesday and again Friday morning when he called on the president to "lead" while repeating his opposition to any tax increases in a deficit deal.

Boehner: U.S. can avoid financial cliff
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Sources close to the process on Capitol Hill said the two parties will need to find a way to get revenue under the existing rates and address entitlement reform.

Obama has already made clear he is willing to negotiate on entitlement reform and invited bipartisan congressional leaders to the White House next week for a meeting.

CNNMoney: What's in the fiscal cliff?

In his address at the White House Friday afternoon, the president stressed the importance of congressional action and compromise, including a bill to protect 98% of Americans who will experience a significant tax hike at the end of the year if a deal is not reached.

"I've got the pen ready to sign the bill right away," Obama said in the White House East Room, referring to the plan to extend tax cuts for those making under $250,000 a year. "I'm ready to do it; I'm ready to do it."

The president said the election proved Americans are on his side in regard to taxes and entitlement reform.

"Our job is to get the majority in Congress to reflect the will of the people," he said, before adding he was encouraged by Boehner's openness to tax revenue.

Obama held firm on the ideas he espoused on the campaign trail that were also included in a detailed plan the White House sent to Capitol Hill in fall 2011.

But there is not much time to negotiate before the new year, a time frame further limited by the Thanksgiving holiday and a just-announced trip by the president to Asia.

Got questions about the fiscal cliff? We'll get the answers

Republicans sources argued it is unlikely the parties can resolve the sticking points in a lame-duck session of Congress, adding they need to agree on a framework deal that can be resolved in 2013.

But don't expect any eye-popping new positions. Sources said the president believes he's been exceedingly clear about how he would like to avoid the painful cuts that would kick in. Throughout his campaign he reiterated his positions while also making clear he would not sign a bill that retained the current low tax rates for the richest Americans.

There's not much time to negotiate. In the days between now and the new year, the nation's leaders will face three events in quick succession:

• First, the Bush-era tax cuts will expire on December 31, triggering a return to higher Clinton-era rates unless new policy is set.

• Second, $1.2 trillion of painful automatic budget cuts will be triggered --- the "sequester" -- unless Congress finds a way to bring that sum into the nation's coffers.

• Third, the country will hit a new debt ceiling midspring. These events, especially the sequester, could have a devastating impact on the economy, pushing it over the fiscal cliff.

A new report by the Congressional Budget Office underscored the urgency of getting a deal done. Its nonpartisan analysts concluded that if the spending cuts take effect, a fiscal crisis will ensue. They also determined that if the spending cuts hit and the tax cuts are allowed to expire -- which would raise money for the government -- it would drive unemployment up to 9.1%. In other words, inaction is a bad option.

"That's a cliff no one wants to go over," Obama senior strategist David Axelrod said.

Leaders on both sides have signaled that they're hopeful that the election will lead to a new spirit of compromise in the capital.

Democrats and Republicans largely agree that the cleanest solution is to address all three crises with a massive reform effort that would both cut government spending and bring in more revenue. It would include changes to the personal tax code, entitlements and debt reduction targets.

CNNMoney: CBO warns of fiscal cliff risk

But, as usual, the devil's in the details.

Obama administration officials have said the president will veto any package that extends the Bush-era tax cuts for those making $250,000 a year or more.

"I've already signed a trillion dollars' worth of spending cuts. I intend to do more, but if we're serious about the deficit, we also have to ask the wealthiest Americans to go back to the rates that they paid when Bill Clinton was in office," the president said as recently as last week.

Before the election, the president's policy director, James Kvaal, explained Obama wants "a balanced plan that cuts the deficit by $4 trillion with $2.50 worth of spending cuts for every dollar in revenue and reduces spending on Medicare, Medicaid and other entitlements."

CNNMoney: Raising taxes is not the same as raising revenue

If a spirit of compromise grips the capital after the election, the best-case scenario is a framework deal: In November and December, the parties would agree to general targets for revenue increases and spending cuts plus new tax terms and then work out the details six or nine months down the road. In this rosy scenario, the nation would avoid a new year's tax hike and the ugly sequester.

Sen. Dick Durbin, D-Illinois, said he thinks a deal is possible.

"We have a chance in the lame duck to at least start the process, and I think there's a chance to rally bipartisan support," he said in an interview before Tuesday's election. "These are basic issues we can work out, and the president is in a position to do that."

Not everyone is so sunny.

Several Democrats said the president has learned from past negotiations with House Republicans and this time will be ready to stand his ground. One top Democrat with close ties to leaders on Capitol Hill and the White House said, "Obama's leverage is he doesn't have to do anything and everyone's taxes go up."

"That's a huge forcing mechanism," one added.

Several senior Democrats told CNN they believe the president would be prepared to allow that increase, which would affect personal income tax, the estate tax, dividends and capital gains taxes.

Adding to the potential for a protracted struggle, it's widely believed that the $1.2 trillion in spending cuts kick in immediately at the start of 2013. However, multiple sources aware of talks said there is wiggle room and that austerity cuts could be delayed to create more time for a deal.

As a result -- in theory at least -- negotiations could continue before the economy takes a direct hit.

Given the influence of Republican super PACs, there is concern among Democrats that Republicans would not get on board with a compromise unless GOP "big money" gets behind them, offering cover for the midterm elections.

Durbin insisted that Obama is hoping for the best with the tax cuts and the sequester but said the president won't yield on either.

"The president isn't going to put either gun in the holster until we have this showdown under way," Durbin said.

Obama, Boehner begin year-end duel on taxes

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