Debt deal: How to kill three birds with one stone

Storm clouds gather above the U.S. Capitol in Washington July 11, 2011.

WASHINGTON (Reuters) - President Barack Obama and Republican leaders have been mired in a dispute over taxes as they try to avert a looming debt default, but a deal is possible that would allow both sides to declare victory.

Republicans could live up to their promise to prevent tax increases. At the same time, Democrats could say they are raising taxes on the rich and boosting the economy.

That could resolve the biggest remaining obstacle to a budget deal that would cover the United States' borrowing needs through the November 2012 elections. Congress needs to act soon to ensure the Treasury can continue paying its bills beyond August 2.

The two sides have already agreed in principle on roughly $1.5 trillion to $2 trillion in spending cuts but have repeatedly clashed over raising new tax revenue, which Democrats insist must be part of any deficit-reduction package.

Republicans say signing off on any increase in taxes would violate a pledge to voters that helped them win control of the House of Representatives last year.

"We're not asking the president to violate his promises to the people of this country and we wish he wouldn't ask us to do the same," Representative Eric Cantor, the No. 2 Republican in the House, told a news conference on Monday.

Cantor scuttled an earlier round of negotiations after Democrats insisted on closing a range of tax breaks and loopholes that benefit the wealthy in order to generate $400 billion in new revenue.

Since then, Obama and other Democrats have accused Republicans of being more interested in protecting these perks -- notably, a benefit for corporate jet owners -- than in solving the country's fiscal problems.

Last week, Cantor suggested a way beyond the impasse. Republicans could support closing some of these tax breaks, he said, as long as they are offset by tax cuts elsewhere.

Cantor said he brought up the proposal at a White House meeting on Sunday. "I mentioned it last night and I'm sure that we'll have to get into the specifics," he said.

ONE STONE, THREE BIRDS

One set of tax cuts could fit into this equation nicely.

Democrats have called for a package of tax cuts and new spending to boost the economy, an effort that has gained new urgency after a dismal jobs report on Friday showed the unemployment rate rising to 9.2 percent.

Republicans initially rejected the idea when it was introduced last month. But they could back some of the cuts to offset other tax revenue, a Republican aide said.

Thus, Cantor's proposal could kill three birds with one stone:

* Democrats could close some of the tax breaks they have targeted;

* Democrats could pass some of the economy-boosting tax breaks they have proposed;

* Republicans could claim that the overall package does not raise taxes.

With those talks ongoing, Cantor has declined to talk about what specific tax provisions could be in play.

Democrats have proposed extending the payroll tax cut, limiting the Alternative Minimum Tax, and making a credit for business' research costs permanent.

Together, they would cost the government about $350 billion in lost revenue over the coming 10 years. That's nearly the size of the $400 billion in tax breaks they had proposed closing as part of the budget talks.

Republicans have shown a willingness to end some tax breaks, which reduce the government's tax haul by $1.1 trillion each year. Most Senate Republicans voted last month to end a subsidy for ethanol producers.

"None of us are fond of loopholes," House Speaker John Boehner said on Monday.

(Reporting by Andy Sullivan; Editing by Christopher Wilson)