WASHINGTON (Reuters) - Sharp differences remained on Wednesday between congressional Republicans and the White House in talks to avert the "fiscal cliff" of steep tax hikes and budget cuts, and negotiators warned the showdown could drag on past Christmas.
Both sides refused to give any ground in public, one day after what U.S. House of Representatives Speaker John Boehner described as a "frank" conversation with President Barack Obama about the remaining hurdles to a deal.
Boehner said Obama's latest proposal for $1.4 trillion in new tax revenues did not fulfill his promise for a balanced approach to taming the federal deficit and could not pass Congress.
"I remain the most optimistic person in this town, but we've got some serious differences," Boehner told reporters after a meeting with House Republicans, where he warned members the negotiations could run through the holidays and up to the end-of-year deadline.
If a deal is not reached, taxes will go up for almost all working Americans at the start of the New Year and steep government spending cuts will kick in.
White House spokesman Jay Carney said Obama would not relent on his demand that Republicans drop their opposition to raising new revenue by increasing the tax rates for the wealthiest 2 percent of all Americans.
"There is no way to do this without rates going up on the top earners," Carney said. The Republican stance that sufficient revenue could be gained by closing tax loopholes and limiting deductions was "just not plausible economic policy," he said.
The feeling of deadlock, at least for now, was evident in the Capitol.
Senior House Republican aides said they have not detected any weakening in Obama's resolve to hold out for tax increases on the rich.
At the same time, many Republicans in the House said they do not want to see any move toward Obama on raising those tax rates.
Representative Kevin Brady of Texas, a senior member of the tax-writing Ways and Means Committee, told reporters that if Republicans were to "crumple" and accept the higher rates on the top two tax brackets, "Then chances of lowering them next September or October" as part of comprehensive tax reform "seems very slim."
Instead, Republicans are "forcing the issue" of achieving big savings to Social Security and Medicare, he said.
In what has now become a daily battle of sound bites and political stagecraft, a group of Republican congressmen posed in the cold outside the Capitol with a few dozen small children to illustrate their argument that Obama's budget proposals would bury the next generation in unsustainable debt.
"We are going to relegate these kids, our grandkids, to a lower standard of living," said Republican Representative Sean Duffy of Wisconsin. "We are going to leave them with higher tax rates. This is unacceptable."
Obama and Boehner each have proposed cutting deficits by more than $4 trillion in the next 10 years as part of a deal to avert the cliff, but they differ on how to get there. Economists have warned that failure to strike a deal could send the economy back into recession.
On Tuesday, Boehner rejected a White House proposal to shrink the amount of deficit reduction that comes from revenue to $1.4 trillion from $1.6 trillion over 10 years. Boehner has called for $800 billion in revenue through tax reform.
'A PRETTY FRANK CONVERSATION'
Boehner said Obama's plan did not do enough to reduce the federal deficit. "The president and I had a pretty frank conversation about just how far apart we are," he said of their phone conversation on Tuesday.
Carney ridiculed the Republican argument that sufficient revenue could be raised by closing tax loopholes or capping deductions. "Those magic beans are just beans, and that fairy dust is just dust," he said. "It is not serious."
Boehner has repeatedly offered gloomy assessments of the state of the talks in public, even as signs of progress have sprouted on Capitol Hill. The pace of staff-level talks has quickened in recent days as the two sides exchanged counter-offers that neither side said was sufficiently detailed.
The stubborn differences have dampened hopes of a deal before the Christmas holiday. "Keep your Christmas decorations up and make no plans" to leave Washington, was Boehner's advice in the closed-door meeting with Republicans, Representative John Shimkus of Illinois told reporters.
In exchange for more tax revenues, Republicans have demanded deep spending cuts in politically popular social entitlement programs like the government-funded Medicare and Medicaid healthcare plans.
House Democratic Leader Nancy Pelosi said House Democrats objected to Republican efforts to raise the age when seniors become eligible for Medicare, which now stands at 65, as a way to cut government spending.
"Raising the retirement age does not get you that much money, so you're doing a bad thing when it comes to seniors, and you're not achieving your goal," she told CBS.
Financial markets have watched the negotiations with interest. JPMorgan Chase & Co CEO Jamie Dimon said the United States could have a "booming economy" in a couple of months if lawmakers in Washington reach agreement.
A budget deal could mean 4 percent economic growth and a drop in unemployment, Dimon said at a New York Times conference in New York. A deal would need to link any tax increases with spending cuts, he said.
"The table is set very well right now," said Dimon.
The stock market was closely following an announcement by the Federal Reserve of a new stimulus plan but the "fiscal cliff" was not far from investors' minds.
"This was expected, and the market is waiting for the year-end 'fiscal cliff' issue to be solved, so what we have to do is have confidence our political system can actually make a functional decision," said Troy Logan, managing director and senior economist at Warren Financial Service, in Exton, Pennsylvania.
Republican Senator Rand Paul of Kentucky suggested in a Fox News interview that to get things moving the House should vote on the stickiest issue - whether to extend expiring tax cuts to all taxpayers except high earners, as Democrats want, or to everyone, as Boehner wants.
(Additional reporting by Jeff Mason, Richard Cowan, Rachelle Younglai, Mark Felsenthal; Writing by John Whitesides; Editing by Alistair Bell and Christopher Wilson)
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