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WASHINGTON (Reuters) - Republicans and Democrats dug in their heels Friday as President Barack Obama prepared to wade into a divisive debate over taxes and spending aimed at heading off a default on the U.S. government's debt.
The White House said Obama would meet separately with Senate Democratic and Republican leaders Monday in an effort to resurrect negotiations that collapsed when Republicans walked out Thursday over Democrats' demands for tax hikes.
"The president is willing to make tough choices but he cannot ask the middle class and seniors to bear all the burden for deficit reduction and sacrifice while millionaires and billionaires ... are let off the hook," said White House spokesman Jay Carney aboard Air Force One.
Republicans Friday ruled out any tax increases as part of an agreement to narrow stubborn budget deficits and raise the U.S. debt limit. The federal deficit now stands at $1.4 trillion, among the highest levels relative to the economy since World War Two.
The $14.3 trillion U.S. debt ceiling must be increased before August 2 or the Treasury Department will run out of money to pay the country's bills. A default on debt payments could send markets plunging around the world and raise the risk of another U.S. recession.
House Speaker John Boehner and fellow Republicans say any package that includes tax increases stands no chance of passing the Republican-controlled House. Senate Republicans threaten to block the measure if it includes tax increases.
"A tax hike can't pass the Congress. They might as well ask us to herd unicorns through the Senate chamber," said Don Stewart, spokesman for Senate Republican leader Mitch McConnell. "It just can't happen."
Conservatives in Congress, including many Tea Party activists who are credited with winning the House for Republicans in the 2010 election, have questioned whether there really is a pressing need to increase the debt limit. They have laid down tough prerequisites to win their votes, including passage of a balanced budget amendment to the Constitution.
Democrats have expanded their demands in recent days to say any package must include measures to boost the struggling economy, which could add to the deficit. They say they will not support a package that relies only on spending cuts.
"Make no mistake. there needs to be revenues in any deal," said senior Democratic Senator Charles Schumer.
Treasury Secretary Timothy Geithner said he was confident Congress could still reach a budget deal, but that it would have to include some tax hikes.
"You need to have modest changes in revenue," Geithner said in New Hampshire. "There is no way to do a deal without it."=
Democrats have eased back from their insistence that personal income tax rates need to rise on the wealthiest Americans to focus instead on ending a wide range of tax breaks on everything from corporate jets to oil and gas subsidies.
They have also proposed closing tax breaks that benefit the wealthy, such as limiting the deductions for households making more than $500,000 a year.
Representative Chris Van Hollen, one of the Democrats who was involved in the failed talks led by Vice President Joe Biden, said Republicans had refused to budge.
"What we've seen is all take and no give," he said.
A senior administration official said eliminating loopholes and tax breaks on corporate jets, energy companies and hedge funds, and capping itemized deductions for wealthier Americans -- all steps identified in Obama's 2012 budget -- could save $400 billion over 10 years.
"This is what they are throwing the fit about. Because they somehow believe that special loopholes for millionaires and billionaires, oil and gas subsidies -- somehow they are willing to go to the wall for that," said a second senior administration official.
But a Republican source familiar with the talks said Democrats were also pushing repeal of the "last in first out," (LIFO) accounting convention that he said would cost manufacturers billions of dollars, while capping itemized deductions would hurt hundreds of thousands of small U.S. businesses.
"They're not talking about a few tax loopholes. They're talking about hundreds of billions of dollars. You can't get there by just going after corporate jets," the source said.
The National Association of Manufacturers estimates that repealing LIFO, which allows companies to match sales revenues against inventory replacement costs, would raise taxes for U.S. companies by $50 billion over 10 years.
Boehner said if Obama offered up spending cuts that were at least the size of a debt limit increase -- thought to be around $2 trillion to $2.5 trillion -- and if new budget reforms were put in place, "He has my word that the House will act on it."
Those are requirements Boehner and fellow Republican leaders have been voicing for months.
"We believe that we can move forward, as long as no one in these talks takes a my-way-or-the-highway approach," Carney said.
Editing by Peter Cooney