Rivals dig in as "fiscal cliff" drama debuts

The U.S. Capitol Dome is seen on Capitol Hill in Washington, November 9, 2012.

WASHINGTON (Reuters) - Both sides in the "fiscal cliff" debate stood their ground on Tuesday as they gathered in Washington for the first time since the elections, with a fundamental tax dispute preventing a broader compromise on deficit reduction.

The White House made clear it was ready to negotiate with Republicans on taxes and spending, but a spokesman for Democratic President Barack Obama said he will not budge on insisting that the wealthy's tax rates must rise in 2013.

The president wants to extend low individual income tax rates beyond year's end for 98 percent of Americans, but he will not agree to extending them for the top 2 percent of earners, said White House spokesman Jay Carney at a news conference.

On the Senate floor, Republican Leader Mitch McConnell said his party was open to discussing new government revenues, but not raising tax rates. "We're ... not about to further weaken the economy by raising tax rates and hurting jobs," he said.

The defiant remarks came as Congress returned from a post-election break with seven weeks left to deal with the "fiscal cliff," a convergence of urgent tax and spending issues that, if mishandled, could plunge the economy into another recession according to the non-partisan Congressional Budget Office.

Generally weak since the elections, U.S. stock markets were flat on Tuesday, with nervous investors eyeing Washington amid skepticism about lawmakers' ability to make fiscal decisions.

About half of Americans doubt that Obama and congressional Republicans will be able to reach an agreement to resolve the "fiscal cliff," according to a poll released on Tuesday by the Pew Research Center for the People and the Press.

A regular survey of small business sentiment on Tuesday showed hopes of a pick-up in sales, but widespread uncertainty among owners about business conditions in the next six months. The National Federation of Independent Business said its optimism index rose 0.3 point to 93.1 in October.

'PHOTO-OP WEEK'

"We're three weeks away from serious negotiations on the fiscal cliff," said Greg Valliere, chief political strategist at Potomac Research Group, a Washington policy analysis firm.

"This is a photo-op week, next week is Thanksgiving, then lawmakers will straggle back to Washington to examine what staffers have come up with. The dominant theme in these three weeks will be trial balloons," he said.

At the end of 2012, low, "temporary" tax rates enacted a decade ago under former President George W. Bush are set to expire. If Congress does nothing, individual income tax rates will rise sharply. That is a key facet of the "fiscal cliff."

Another element is deep, across-the-board cuts in federal programs that will take effect in January if Congress takes no action. Lawmakers fear the cuts, known as the "sequester," could devastate the economy and many are working to prevent them.

Obama - fresh from a re-election triumph over Republican challenger Mitt Romney - hosted liberal and labor groups at the White House. Attendees said Obama made his tax cut stance clear, but did not ring-fence big government social programs dear to Democrats, such as Medicare, Medicaid and Social Security.

"There was absolute consensus in the room that ... tax cuts for the top 2 percent" must not be extended, said Dennis van Roekel, head of the National Education Association teachers' union.

In New York at an investor conference, Bank of America Corp Chief Executive Brian Moynihan said fiscal brinkmanship in Washington is already affecting the U.S. economy as worried businesses invest less in equipment.

Corporate chieftains were slated to visit the White House on Wednesday to talk with Obama. The U.S. Chamber of Commerce, the nation's largest business lobbying group, backed mostly Republicans in the elections and has not been invited.

Chamber President Thomas Donohue brushed off the exclusion. "The president has a lot of meetings," he said at a roundtable with reporters.

(Additional reporting by Kim Dixon, Richard Cowan, Rachelle Younglai, Thomas Ferraro, Lisa Lambert; with David Gaffen and Rick Rothacker in New York; Editing by Fred Barbash and Cynthia Osterman)