'Fiscal cliff' deal closer, but gaps remain

President Barack Obama and House Speaker John Boehner have come significantly closer to bridging gaps on critical issues such as tax hikes for the wealthy and cuts in Social Security cost-of-living benefits.

WASHINGTON — After making major concessions on long-held "fiscal cliff" positions, President Barack Obama and House Speaker John Boehner will test the reaction Tuesday of their respective parties in the U.S. Congress and continue talks aimed at further narrowing their differences.

The effort is designed to avert the steep tax hikes and across the board spending cuts set to take effect unless a deal is enacted into law before Dec. 31. Enactment would require a buy-in by the full U.S. Senate and House on whatever Obama and Boehner present to them. Neither Obama or Boehner can be certain yet on how much resistance they might meet.

Infographic: What the 'fiscal cliff' means to you

Though much work remains, the progress contrasted dramatically with previous movement so slow that as recently as Sunday, some Washington insiders saw a 50-50 chance of going over the cliff — which the Congressional Budget Office says would bring on a new recession.

In rapid developments Monday, the two sides came significantly closer to bridging gaps on critical issues such as tax hikes for the wealthy and cuts in Social Security cost-of-living benefits. Those issues have the potential to cause problems politically for both leaders, as Republicans and Democrats start to study them.

Obama is offering to reduce cost-of-living increases for Social Security recipients. Republicans have been seeking this as a key to long-term deficit reduction. But many congressional Democrats oppose it.

Government pensions and veterans' benefits would also get smaller cost-of-living increases.

In addition, taxpayers, especially low- and middle-income families, would pay more because of changes in the way that tax brackets are adjusted for inflation.

Obama and Boehner made the most headway on extending the reduced tax rates originally enacted in the administration of President George W. Bush. Both have agreed to keep the low rates for everyone but the wealthy, but they still differ on who qualifies as wealthy for tax purposes.

Obama, whose definition has for months been taxpayers above the $250,000 threshold, traveled to $400,000 in his latest offer. Boehner was at $1 million, but could move down to $500,000. The top tax income tax rate would increase from 35 percent to 39.6 percent.

Related: Boehner tax hike offer shifts 'fiscal cliff' talks

MEDICARE

Obama continues to reject Republicans' plan to raise Medicare's eligibility age from 65 to 67. Boehner now says raising the eligibility age is not essential to a deal.

Obama wants to limit cuts in Medicare and other health care programs to about $400 billion over 10 years; Republicans want to overhaul Medicare to save even more money.

DEBT LIMIT

Obama wants a deal that would raise the amount the government is allowed to borrow to cover the next two years, to avoid another debt showdown with Congress until after the 2014 midterm elections.

Previously, Obama had demanded permanent authority to increase the debt ceiling without congressional approval. Republicans want Congress to be part of the decision-making process so they can demand budget-cutting in exchange for additional borrowing.

OTHER TAXES

Obama and Boehner both propose raising taxes on dividends and capital gains from 15 percent to 20 percent.

Both sides would reduce the number of deductions and exemptions that wealthy taxpayers can claim.

Obama would also let estate taxes revert to a 45 percent rate, after the first $3.5 million of an estate is exempted. Boehner backs a plan for a 35 percent rate and $5 million exemption

Obama also offered a "fast track" process for major tax and spending reforms in the year ahead. A Republican aide who asked not to be identified said that "conceptually," there was agreement to make permanent changes in the tax code, with some of those changes taking effect at the start of 2013 and others at the beginning of 2014.

A comprehensive cliff-avoiding agreement would immediately substitute new and more targeted spending cuts for the indiscriminate slashing of defense and non-defense programs known as "sequestration."

Boehner and Obama have made headway on the politically explosive question of the president's ability to avoid constant battles over raising the debt ceiling, which controls the level of borrowing by the government. Boehner is ready to give Obama a year of relative immunity from conservative strife over the debt ceiling, while Obama is pushing for two years.

Boehner is set to meet Tuesday morning with Republicans in the House and then speak to reporters. Also likely Tuesday is a White House briefing which could shed more light on the work ahead.

The reaction Tuesday from their party allies in Congress may help determine how much further each can go to finish off a deal and how much long it would require to do so.

Reporting by Richard Cowan, Mark Felsenthal, David Lawder and Fred Barbash. Editing by Fred Barbash.

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