RPT-U.S. Congress created this cliff and may now plunge off it
* Outcome of lame-duck session uncertain
* First talks set following bitter election campaign
* Tax hikes on rich are toughest question
By Richard Cowan
WASHINGTON, Nov 11 (Reuters) - The "fiscal cliff," a metaphor drawn from nature, was actually created by members of the U.S. Congress, who designed it to be so horrible that they and the president would come to their senses and avert it in the nick of time.
That time is now with the start this week of a lame-duck session of Congress. But it is not at all certain that Republicans and Democrats are ready to make the compromises necessary to undo the trap they set in August 2011.
With all the time available since then, optimists assumed that Congress and President Barack Obama would return after last week's elections with a plan - perhaps a temporary fix - to avoid the $600 billion in tax increases and budget cuts set to start in January that threaten to throw the economy back into recession.
But they didn't.
Some also assumed the election would give one party or the other an edge that could break the impasse over how to reduce the nation's deficit.
Both sides say publicly and privately that they have the advantage - and a mandate from voters to do things their way. It remains to be seen whether such assertions are just opening moves.
Once again, optimists assume the parties will rescue themselves - and the country - from the crisis they created.
But confidence is low, which is one reason global markets tumbled last week.
CAN THIS MARRIAGE BE SAVED?
A different metaphor might now present itself, drawn from life.
For 16 months, Democrats and Republicans behaved like a husband and wife in an ugly divorce proceeding, not speaking to each other except through invective.
Now they will see if their troubled marriage can be salvaged, for the sake of the children, which in this case is the U.S. economy. The non-partisan Congressional Budget Office reiterated last week that jumping off the cliff would boost the jobless rate to 9 percent from the current 7.9 percent.
For Obama, who won four more years in office in Tuesday's election, this is his moment to bring a "balanced approach" to healing the nation's fiscal problems.
In the Democrat's eyes, that means keeping lower tax rates for the poor and middle class, while forcing the rich to pay more income taxes. White House spokesman Jay Carney renewed the president's vow to veto legislation that simply extends the tax cuts, which originated during the administration of President George W. Bush.
If Republicans were to agree to the higher tax rates on the wealthy, that would open the door to deals on a new round of spending cuts, including sensitive "entitlement" programs, such as the Medicare healthcare program for the elderly, some Democrats say privately.
The top U.S. Republican, House of Representatives Speaker John Boehner, does not see it that way. He has long argued that raising taxes on top earners would hurt small-business hiring and slow an already sluggish economy.
With voters giving Republicans another two years to rule the House, Boehner argues it would be a mistake for Obama to conclude that he has a mandate from voters to hike income taxes.
"Instead of raising tax rates on the American people and accepting the damage it will do to our economy, let's start to actually solve the problem," Boehner said in a Saturday radio address.
"Let's focus on tax reform that closes special-interest loopholes and lowers tax rates," he added.
The problem is that tax reform will take months, if not years, to do in Congress, and lawmakers have only about six weeks to avert the fiscal cliff by at least coming up with a short-term compromise and addressing more radical reform in the following months.
A senior Senate Democratic aide said Republicans were "underestimating the bully pulpit he (Obama) has. He's going to focus on this and this alone for the next two months. They're underestimating his ability to sway the American people" if they block a tax hike on the rich.
The Democratic aide said that if Obama produced a new plan for avoiding the fiscal cliff, including higher income taxes on the rich, "Boehner's reaction to that document will be the most pivotal point" in the upcoming fight.
Will Boehner reject it as a dead-end plan, or will he find "good things in there and say, 'Let's negotiate,'" the aide said.
A senior Senate Republican aide argued his party had the advantage. If negotiations break down over raising taxes on upper-income groups, thus causing all income tax rates to rise in January, "Will Obama really want to start his new term by pushing the economy into recession?" the aide said.
With the election over, Democrats and Republicans in Congress anticipate that Obama will offer up new ideas toward a compromise, possibly before he departs for a trip to Myanmar at week's end.
GAME OF CHICKEN
Despite elections that were supposed to break Washington's deadlock over fixing the economy, the post-election world still has fundamental disagreements, even if the rhetoric has cooled.
Some in Congress argue there is always a way to find compromise, or "wiggle room," as one Senate Republican leadership aide called it.
Instead of a $250,000 threshold for raising income taxes, he threw out $500,000, although quickly adding, "We might even push to get it higher than $500,000."
But that too poses problems. Boehner and Senate Republican leader Mitch McConnell, who faces re-election in 2014, could stir up fierce opposition from their right-wing members, including Tea Party activists, if they back any income tax increase.
Furthermore, Democrats have squirmed over the prospects of arguing to lower-income constituents that someone earning $500,000 a year or more is middle-class.
Still others point to a different approach as a way out. Instead of raising income taxes on the rich, they see a fiscal cliff compromise in ending some other tax benefits that the well-off now enjoy - something to which Boehner says he is open.
There are plenty of those, ranging from breaks for corporate jets to oil industry manufacturing credits. While Democrats favor ending those breaks too, they very much want to kill off for good the lower income taxes for the rich and capture the $850 billion in revenues over 10 years.
All those cross-currents lead some to believe that lawmakers will be unable to bridge their differences during the post-election session that begins on Tuesday.
In September 2008, when the House voted down the banking bailout plan known as TARP, it took a sharp plunge in the financial markets to get Congress to change its mind.
"I for one have come reluctantly to the idea that we might need something as jarring as going off the fiscal cliff to bring a compromise," said Jim Manley, a former aide to Senate Majority Leader Harry Reid.
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