Taxes still a stumbling block in debt talks

After months of effort, President Barack Obama and congressional Republicans are right back where they started as they try to avert a looming debt default: arguing over taxes.

With a grand bargain to tame the national debt seemingly off the table, Obama, House of Representatives Speaker John Boehner and other leaders will try for a more modest deal when they resume discussions at the White House Monday afternoon.

But negotiators will have to confront a divide over taxes that has prevented them from reaching a deal so far. Democrats say new tax revenues need to be part of the equation, while Republicans say they won't back any increase in taxes.

A highly anticipated Sunday meeting broke little new ground. Obama and his fellow Democrats repeated the need for a balanced approach, while Republicans restated their position that tax increases would further burden the already shaky economy. Senate Democratic Leader Harry Reid lectured Republicans for backing away from tough decisions, sources said, while Boehner was largely silent.

A source familiar with the meeting described it as a frank exchange of views -- Washington-speak for acrimonious.

The post-meeting rhetoric seemed to bear this out.

It's baffling that the President and his party continue to insist on massive tax hikes in the middle of a jobs crisis, said Don Stewart, a spokesman for Senate Republican Leader Mitch McConnell.

Reid's spokesman, Adam Jentleson, said: The stakes are too high for Republicans to keep taking the easy way out.

Time is running short to break the impasse.

The Treasury Department has warned that it will run out of money to cover the country's bills if Congress does not raise the $14.3 trillion debt limit by August 2. Failure to do so could push the country back into recession, send shock waves through global markets and threaten the dollar's reserve status.

The real deadline is even closer. Participants say a deal should be in place July 22 to ensure Congress has time to act. Obama told lawmakers to be ready to meet every day this week.

But Senator Jim DeMint, a Republican aligned with the fiscally conservative Tea Party movement, said the threat of default was overblown.

We're not going to default. We've got enough tax revenue to pay our bills, DeMint told NBC's Today Show on Monday.

We don't need to panic and rush into a deal, he added.

If White House talks produce no plan this week, DeMint said Republicans would introduce a bill to raise the debt ceiling in exchange for reasonable spending cuts, caps and movement toward a balanced budget amendment.

TAXES SCUTTLE 'GRAND BARGAIN' AND SMALLER DEAL

Aides to Boehner and Obama had spent much of the past week discussing an ambitious budget deal that would have reformed the tax code and popular social spending programs and scaled back annual defense and domestic spending.

The goal was the $4 trillion in budget savings, measured over 10 years, that budget experts say is needed to keep the national debt at a sustainable level.

Obama wanted between $1.3 trillion and $1.7 trillion of that total to come from new tax revenue, according to a Republican source. That would have come in part by allowing the current lowered tax rate for the highest earners to rise back to its 1990s levels in 2013, while keeping the lower rates in place for middle- and low-income earners.

Republicans felt that what Democrats offered in return -- a promise to lower tax rates across the board while closing a range of tax breaks -- was not enough.

On Sunday, Obama and other Democrats pressed for the grand bargain but Republicans said they wanted a smaller deal.

With savings of around $2 trillion, that would cover the nation's borrowing needs through the November 2012 elections.

Many elements of that deal have already been hammered out in talks led by Vice President Joe Biden, but taxes proved to be a stumbling block in those sessions as well.

Representative Eric Cantor, the No. 2 House Republican, walked out June 23 after Democrats insisted on closing $400 billion worth of tax breaks that largely benefit the wealthy.

There could be a way out.

Last week, Cantor said he could support closing some tax breaks if they were offset with tax cuts elsewhere.

Democrats have proposed a range of tax cuts to boost the economy, including an extension of the current payroll tax cut and a permanent credit for research and development costs.

That approach would allow both sides to declare victory -- Republicans would get a deal that doesn't raise taxes overall, and Democrats could say they raised taxes on the rich and helped bring down the 9.2 percent unemployment rate.

(Additional reporting by David Morgan; Editing by Eric Beech)