Obama signals he may compromise on tax cuts

President Barack Obama answers a question during a post-election news conference in the East Room of the White House in Washington, November 3, 2010.

WASHINGTON (Reuters) - President Barack Obama gave his clearest signal yet on Saturday of a possible post-election compromise with resurgent Republicans that could prevent tax rates from rising for any American, even the wealthiest, come January.

Obama, in his first weekly radio address since his Democrats suffered big losses in Tuesday's congressional elections, reasserted that Bush-era tax cuts should be made permanent for the middle class before they expire at year-end.

But while insisting tax cuts for wealthier Americans should not become permanent because of a $700 billion impact on the deficit over the next decade, he left the door open to a temporary extension for higher income levels -- as long as it falls short of costing that much.

"I believe there's room for us to compromise and get it done together," Obama said, previewing his administration's negotiating stance when the current Congress returns later this month for its final session.

It was the latest sign that Obama might give ground in the high-stakes tax battle, which could test the new dynamic in Washington after Republicans won control of the House of Representatives and weakened the Democrats' Senate majority.

The conciliatory tone comes after Obama had argued fervently for months that the country could not afford to keep tax rates low on those with individual incomes above $200,000.

The possible makings of an agreement that the Democrats could support points to a permanent extension for the middle class coupled with a temporary extension -- possibly for a year or more -- of higher earners' tax cuts.

Republicans, emboldened by their election victories and vowing to block Obama's agenda, have taken a harder line on making permanent for all Americans, including the wealthiest, the tax cuts enacted under former President George W. Bush.

GRIDLOCK OR COMPROMISE

Obama, for his part, made clear he still does not want the rates for the wealthier Americans to be set permanently lower but stopped short of saying he would oppose a temporary fix.

"I believe we can't afford to borrow and spend another $700 billion on permanent tax cuts for millionaires and billionaires," he said. He will meet Democratic and Republican leaders at the White House on November 18 to discuss the issue.

The pressure for compromise is that neither party wants to alienate middle-class voters, who on Tuesday punished Democrats at the polls for Obama's economic policies that have failed to put much of a dent in persistently high unemployment.

"All of us want certainty for middle-class Americans," Obama said. "None of us want them to wake up on January 1st with a higher tax bill."

Lawmakers return the week after next for a post-election "lame duck" session. Until the new Congress convenes in January, Democrats will still be in charge in the House.

But gridlock is still possible, especially over sensitive tax policy in the context of a $1.3 trillion budget deficit. Republicans must now decide what their best option is -- take what they can get from Democrats now or wait until next year.

Republicans say small businesses would be hurt if taxes on the wealthiest rise. About 3 percent of small business would be impacted, but they account for about half of small business income, according to the congressional Joint Committee on Taxation. The lower rates for the wealthiest would impact about 3 percent of all Americans.

(Additional reporting by Kim Dixon; Editing by Eric Beech)