Analysis: Progress amid the deficit-cut noise

WASHINGTON Thu Nov 10, 2011 3:08am EST

Senator Richard Durbin (D-IL) walks to a caucus meeting with Senate Democrats on Capitol Hill in Washington August 1, 2011. REUTERS/Joshua Roberts

Senator Richard Durbin (D-IL) walks to a caucus meeting with Senate Democrats on Capitol Hill in Washington August 1, 2011.

Credit: Reuters/Joshua Roberts

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WASHINGTON (Reuters) - Angry words and rejected proposals have been the hallmark lately of deficit-reduction talks in Congress, masking signs that the two sides are starting to move toward a possible compromise.

With time evaporating for a congressional "super committee" to find at least $1.2 trillion in budget savings over 10 years, there are still no guarantees that Republicans and Democrats can agree on a deal by a November 23 deadline.

Both sides made counter offers this week after swiftly rejecting each's other initial plan last week. An analysis of all the proposals shows negotiators are inching away from entrenched positions as they search for compromise.

After about two months of closed-door meetings that produced few outward signs of progress, Republicans and Democrats in recent days have been floating ideas, mainly on the hot-button issue of taxes, that demonstrate a new willingness to reach out to their opponents.

The ideas, ranging from ending some special-interest tax breaks for corporations to letting the rich maintain their current income tax rate, marked significant shifts.

"The fact that Republicans have mentioned the word 'revenue' is a breakthrough," Richard Durbin, the No. 2 Democrat in the Senate, told the Reuters Washington Summit on Wednesday.

The liberal lawmaker was referring to a proposal offered by a Republican super committee member, Senator Patrick Toomey, earlier this week. It called for limiting tax deductions, in part to help bring more money into federal coffers to reduce deficits.

Democrats rejected the proposal, complaining it was coupled with huge new tax cuts for the wealthy while potentially adding to the tax bill for middle-income earners, who could lose some deductions.

Despite that, both parties took note that tax revenues for the first time were put into the deficit-reduction mix by Republicans.

Republican Senator John Cornyn, Durbin's ideological opposite, said of his party's offer to limit tax deductions, "We recognize this is a good-faith way to allow Democrats to say they got additional revenue by doing tax reform, cutting out a lot of loopholes."

WALKING OR TALKING?

There is also evidence of conciliation on the Democratic side.

Democrats floated a new plan on Monday that included a major concession to Republicans -- no tax rate hikes on the rich, despite earlier demands by President Barack Obama and many of his fellow Democrats.

Under the Democratic proposal, obtained by Reuters, individual tax rates for the highest earners would be capped at 35 percent. The current top tax rate of 35 percent is set to jump to 39.5 percent in January 2013 unless Congress acts.

Prominent Republicans have been calling for lowering the top rate to as low as 25 percent. Their latest proposal called for a 28 percent top rate.

"We thought we were close to a deal" on Monday, a Republican congressional aide told Reuters.

The aide said Republicans also showed a willingness to go along with a major Obama demand: ending some special-interest loopholes, such as corporate jet tax breaks. Scrapping the tax breaks would bring in about $60 billion in revenues from corporations, the aide said.

Other developments in recent days further heartened deficit hawks.

A bipartisan group of about 45 senators has been urging the super committee to "go big" and find far more than its mandated target of $1.2 trillion in savings. About 40 Republican congressmen joined last week with about 60 Democrats in a letter saying revenues had to be part of any super committee deal.

But for all the focus on the process toward a deal, it is the final product that matters for credit rating agencies watching closely to see whether Washington can demonstrate the political will to deal with its huge deficits.

"We tend to look at not all of the noise and everything that goes into the process, but what are the results," Moody's chief U.S. analyst Stephen Hess told Reuters.

(Editing by Peter Cooney)

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