Top lawmakers will tackle the politically treacherous topic of tax hikes in their next round of debt-reduction talks, a Republican involved in the discussions said on Tuesday.

They (Democrats) want to talk about revenues, we want to talk about spending constraints, Jon Kyl, the No. 2 Republican in the Senate, told Reuters.

Kyl's comments suggest that negotiations led by Vice President Joe Biden are preparing to tackle one of the main stumbling blocks on Thursday in their effort to reach a deal that would allow Congress to increase the country's borrowing authority before an August 2 deadline.

Top Republicans have said that any increase in the country's $14.3 trillion debt ceiling would have to be matched by an equal amount in spending cuts, though they would not likely take effect immediately.

Democrats insist that any deal must include increased tax revenues as well as spending cuts, an option Republicans have so far refused to consider.

Kyl told reporters that about $2.5 trillion in cuts would be in order before Republicans would be willing to consider a $2.4 trillion increase in borrowing authority that would be enough to cover the country's needs through the November 2012 elections.

If you can't get about $2.5 trillion in real savings, then I don't think there'd be much of an appetite on our side to raise the debt ceiling by $2.4 trillion, Kyl said.

Kyl said that the spending cuts can play out over a decade or more.

A BAR TOO HIGH?

An aide to Kyl, clarifying the senator's remarks to reporters, said that Biden and the bipartisan group of lawmakers have not yet settled on specific dollar amounts for deficit reductions and a debt limit increase. Biden and House Republican Leader Eric Cantor have both said the group could find more than $1 trillion in savings.

A Democratic aide said Kyl was setting the bar too high.

Republicans are again rooting for the president to fail by setting unattainable expectations -- at the same point they take many of the ways to reduce deficits entirely off the table, the aide said in an email.

Kyl is one of six members of Congress holding regular meetings with Vice President Joe Biden to try to work out a spending cut and debt limit deal before August 2, when the Treasury Department says it runs out of tools for managing the U.S. debt without an increase in borrowing authority.

The Obama administration and Congress need to reach a deal in July some time that could include long-term savings to the Medicare health insurance program for the elderly and disabled, Kyl said.

Kyl has previously said the group has identified about $150 billion in mutually acceptable cuts, and he said staffers have been working steadily since the last meeting on May 26.

Kyl said the Biden-led negotiations needed to make significant long-term savings in Medicare and the Social Security retirement programs -- an approach Democrats have resisted.

If we don't create some way to save Medicare, for example, then I think the markets could interpret our results as a failure and go south pretty fast, the Arizona senator said.

Democrats are balking at Republican ideas for saving Medicare, which include a proposal to privatize the program for future retirees. That has been estimated to cost the elderly about $6,000 a year per person in additional medical costs.

Polls show that approach is not popular with the public.

(Editing by Eric Walsh)

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