WRAPUP 6-Hopes rise for 'fiscal cliff' deal as Obama, Boehner meet

* White House meeting a sign of progress

* Obama might agree to slow benefit growth -aide

* Senate to complete work after Christmas, Reid says

WASHINGTON, Dec 17 (Reuters) - The differences over how to

resolve the "fiscal cliff" narrowed significantly Monday night

as President Barack Obama made a counter-offer to Republicans

that included a major change in position on tax hikes for the

wealthy, according to a source familiar with the talks.

The move, which the source stressed was not Obama's final

offer, was welcomed, albeit with reservations, by a spokesman

for Republican House of Representatives Speaker John Boehner,

who met earlier in the day with Obama as the two hammered out a

way to avert steep tax hikes and indiscriminate spending

reductions set for the beginning of 2013.

Considerable work remains as both sides now try to bridge

the gaps between them and then sell a package to their

respective allies in the U.S. Congress.

In its most dramatic change in position yet, the White House

proposed leaving lower tax rates in place for everyone except

those earning $400,000 and above, the source said on condition

of anonymity. That's up from the $250,000 threshold the

president has been demanding for months, but still far from

Boehner's preference of $1 million.

Obama also moved closer to Boehner on the proportion of a

ten-year deficit reduction package that should come from

increased revenue, as opposed to cuts in government spending.

Obama is now willing to accept a revenue figure of $1.2

trillion, down from his previous $1.4 trillion proposal.

Boehner's latest proposal calls for $1 trillion in new tax

revenue, which would come from raising rates and limiting

deductions that the wealthiest can take.

Some of the savings in spending proposed by Obama would come

from reducing the size of cost-of-living increases for all but

the most "vulnerable" recipients of the Social Security

retirement program, the source said, through the use of a

different formula to calculate the regular raises called

"chained Consumer Price Index."

Obama and Boehner remained apart on the politically

explosive issue of how and when to raise the government debt

ceiling to permit the government to borrow more money.

Boehner has proposed a one-year boost in the debt ceiling,

tied to spending cuts. Obama, as of Monday night, was pushing

for a two-year increase, potentially a major concession that

many congressional conservatives may find hard to swallow since

they have used it to extract spending cuts from the White House.

Missing entirely from Obama's offer was an extension of the

so-called "payroll tax holiday," which comes to an end on Jan. 1

with an immediate negative impact on wage earners.

Introduced by Obama two years ago as an economic stimulus,

the tax holiday reduced an employee's share of the payroll tax

from 6.2 percent to 4.2 percent. Because the tax supports the

Social Security program, however, there have been divisions in

both parties over continuing the holiday.

Because the details were incomplete and specifics vague,

particularly on such issues as cutting the Medicare, the

government health insurance program for seniors, it was

uncertain how much resistance might come from Congress.

But the source stressed that Monday's offer was by no means

the final one from the White House.

The response from Boehner's spokesman was also a positive

signal. "Any movement away from the unrealistic offers the

president has made previously is a step in the right direction,"

the spokesman said, emphasizing that differences remain on

spending levels in particular.

"We hope to continue discussions with the president so we

can reach an agreement that is truly balanced and begins to

solve our spending problem."

The rapid developments Monday evening put a deal

realistically within reach.

Obama and Boehner held talks at the White House earlier

Monday, and aides from both parties said they were optimistic an

agreement was shaping up.

Rank-and-file Republicans, however, could have trouble with

the tax increases on the wealthiest Americans that are likely to

be part of any deal, while Obama could have a tough time selling

spending cuts to his fellow Democrats.

Investors were cheered earlier Monday, before news broke of

Obama's counter-offer, by signs of progress and the Standard &

Poor's 500 index of U.S. stocks rose 1.19 percent.

Economists warn that going over the fiscal cliff could push

the economy into recession.

Senate Democratic leader Harry Reid said his chamber will

wrap up work on the issue after Christmas.

"It appears that we're going to be coming back the day after

Christmas to complete work on the 'fiscal cliff,'" he said on

the Senate floor.

Boehner faces a crucial test on Tuesday morning when he is

expected to brief his party's lawmakers in the

Republican-controlled House. He is not expected to bring any

deal up for a vote unless a majority of the 241 House

Republicans support it.

Republicans have campaigned for decades on a promise to keep

taxes low, but Boehner in recent days has edged closer to

Obama's demand to raise tax rates on top earners. In return,

Obama could back a measure that would slow the rate of growth of

Social Security benefits by changing the way they are measured

against inflation, according to a Senate Democratic aide.

GETTING CLOSER ON TAXES

If there are no strong objections, he could try to finalize

the deal with Obama on Wednesday, a Republican aide said.

Both sides declined to say what Boehner and Obama discussed

at the meeting, which was also attended by Treasury Secretary

Timothy Geithner.

The White House said Boehner's latest proposal does not meet

its standards.

"Thus far, the president's proposal is the only proposal

that we have seen that achieves the balance that is so

necessary," White House spokesman Jay Carney said at a news

briefing.

Republicans understand that the clock is ticking and they

are confident that Boehner will get a deal they can support in

the coming days, a senior House Republican aide said.

Republicans want substantial spending cuts in return for

increased tax revenue, but any proposal to trim popular benefit

programs like Medicare will face fierce resistance from liberal

Democrats, whose votes will be needed to get a deal passed.

Obama could also face strong opposition from Democrats if he

agrees to Boehner's proposal to slow the growth of Social

Security benefits by changing the way the cost-of-living

increases are measured against inflation, an approach that could

save $200 billion over 10 years.

Obama also wants to head off another confrontation over the

U.S. debt limit, which will need to be raised in the coming

months. Republicans insist that any increase in the government's

$16.4 trillion borrowing authority must be paired with an equal

reduction in spending.

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