Geithner and lawmakers seek deal on Bush-era tax cuts

Treasury Secretary Tim Geithner speaks at the financial stability oversight council (FSOC) meeting at the Treasury Department in Washington, November 23, 2010.

WASHINGTON (Reuters) - President Barack Obama's top economic advisers sought to break a deadlock over taxes with leaders in Congress on Wednesday, haggling over how to extend Bush-era rates while the country struggles with sky-high debt.

Treasury Secretary Timothy Geithner, who is leading talks for the White House along with budget director Jack Lew, said congressional Republicans and Democrats held a "civil, constructive discussion," but declined to give specifics.

Obama expressed confidence a deal could be reached.

"There are going to be ups and downs in this process but I'm confident that we're going to be able to get it done," he told reporters at the White House.

Meanwhile Obama's commission to balance the U.S. budget softened a proposed tax overhaul to win broader support for a plan to slash the federal deficit.

The White House withheld comment on the panel's proposals, giving space to its leaders to build political support.

On Wednesday, co-chairmen of the deficit panel were actively seeking the backing of their fellow panel members.

They need 14 of 18 panel members to support their plan to trigger a vote in Congress. A final vote was set for Friday.

Political support on the tax issue is a top concern for Obama before the end of the year.

Democrats want to extend lower tax rates only on individual income up to $200,000, while Republicans want to extend lower rates for the wealthiest Americans, too.

Obama and many fellow Democrats say extending tax cuts for top earners would cost an unaffordable $700 billion at a time when the country is trying to bring its deficit under control. Republicans say higher taxes would hurt the economic recovery.

"We went through everything on the table," Geithner told reporters after his first meeting with lawmakers. "We also agreed, this is very important, that we are not going to characterize the discussions in the room."

Another meeting was scheduled for later in the day.

FINDING COMMON GROUND

The parties continued to haggle outside closed doors.

Senate Republican leader Mitch McConnell wrote Senate Democratic Leader Harry Reid on Wednesday pledging to block any other legislation that might come up until Congress acts on the tax issue and agrees on a measure to fund the government for the next several months.

"With little time left in this congressional session, legislative scheduling should be focused on these critical priorities," McConnell wrote.

The House of Representatives, which is under Democrats' control until the end of the year, is set to vote on Thursday to extend only the middle-class tax cuts that are set to expire at the end of the year.

That vote is seen as a chance for liberals to go on record against Republican demands. Majority Leader Steny Hoyer said it would not undermine the Geithner-led talks.

"I don't think it will undermine it, nor is it an attempt to embarrass Republicans," he said.

If Congress does not act, all taxpayers could see smaller paychecks come January, as a host of tax cuts including those on wages enacted under former President George W. Bush expire.

Republicans have little incentive to bargain with Democrats and have already said that if Congress fails to extend the tax cuts by year-end, they will take up the issue when they assume control of the House in January.

But the looming expiration has begun to unnerve investors, worried both about personal income tax rates as well as taxes on dividends and capital gains. Lawmakers are debating both personal income and investment taxes together and sources say there is no move to decouple them in the push for a deal.

TAXES, DEFICITS

Given the December 31 deadline, Wall Street is more concerned about tax cuts than America's ballooning deficit, although both are of concern over the long term.

Geithner's meetings on Capitol Hill come a day after Obama met congressional leaders at the White House, seeking an as-yet elusive compromise on the tax debate.

Many analysts expect the most likely deal would be an extension for all income groups, lasting for one to three years, though a deadlock is not discounted.

Expiration of all the lower tax rates, especially those for the middle class and lower-income Americans, would harm the U.S. economic recovery, many economists say.

It could cut economic growth by roughly 1 percentage point a year, according to some Wall Street estimates, though many believe any bump in taxes would be short term.

Short-term, any deal to extend the Bush tax cuts will make it more difficult to balance the budget and trim the $13.8 trillion federal debt.

Extending the low rates under the Democrats' plan would bring in $2.9 trillion less in revenue over a decade, while the cuts the Republicans want for top wage earners would cost the country an additional $700 billion over ten years.

(Additional reporting by Andy Sullivan)

(Writing by Jeff Mason and Kim Dixon; Editing by Cynthia Osterman and Todd Eastham)