(Bloomberg) President Barack Obama lowered his tax revenue demand by $200 billion and offered to start tax rate increases at $400,000 in income instead of $250,000, moving closer to a budget deal with House Speaker John Boehner.

Obama’s revised plan would raise $1.2 trillion in taxes in the next decade and cut $1.22 trillion in spending, said a person familiar with the talks. Obama wants a large enough debt ceiling increase for the next two years and would accept a new inflation yardstick that would reduce Social Security cost-of-living increases, said the person, who sought anonymity.

Boehner and Majority Leader Eric Cantor will give House Republicans an update on the negotiations Tuesday, said a leadership aide who requested anonymity to discuss the plans.

Boehner’s office rejected the offer late Monday, and the intensifying talks could collapse. Still, a deal about halfway between the most recent offers could include $1 trillion each in tax increases and spending cuts and allow tax rates for top earners to rise in 2013.

In exchange, Obama would accept some up-front spending cuts, and other scheduled cuts would be canceled. Congress would pursue broader changes next year against the threat of tax increases and spending cuts in 2014.

‘Realm of Possible’
The Stoxx Europe 600 Index rose for the first time in four days, gaining 0.4 percent to 280.29 at 10:02 a.m. in London. Standard & Poor’s 500 Index futures increased 0.4 percent, while the MSCI Asia Pacific Index climbed 0.5 percent.

“They know what’s in the realm of possible and it’s a question of whether they can take the final step to make a deal work,” said Arshi Siddiqui, a former tax aide to House Minority Leader Nancy Pelosi, a California Democrat. “A big deal is going to be hard to sell on both sides, so it’s going to have to be a well-negotiated deal where both sides make real concessions.”

Obama and Boehner are trying to reach an agreement to avoid more than $600 billion in tax increases and spending cuts scheduled to begin in January, the so-called fiscal cliff. They want to replace the immediate deficit reduction with more gradual changes.

The two are talking about policy changes they would rather avoid. Boehner agreed last week to accept higher tax rates on annual household income above $1 million. Obama moved off the $250,000 threshold he has used for five years and offered to change the cost-of-living calculation for Social Security.

Far Apart
The President and Boehner are still far apart on where to draw the line on tax rates, whether a deal should include economic stimulus spending and how to address the debt limit.

Obama’s offer didn’t adhere to Boehner’s insistence on a dollar of spending cuts for each dollar of debt limit increase, and it’s unacceptable to Boehner, said senior Republican aides who requested anonymity because they weren’t authorized to speak publicly.

The President would set the top tax rates on dividends and capital gains at 20 percent, the person said. Combined with tax increases from the 2010 health-care law scheduled to take effect in January, the top rates would be 23.8 percent.

Obama would return the estate tax to 2009 parameters, with a $3.5 million per-person exemption and a 45 percent top rate.

Raising Money
The dividend proposal matches the bill Senate Democrats passed in July and would raise less money than Obama’s budget, which called for taxing dividends as ordinary income. The estate proposal is less generous than the parameters backed by many Senate Democrats, who want to extend the $5.12 million exemption and 35 percent top rate.

Boehner and Obama have been discussing Obama’s proposal for capping top earners’ tax breaks at the value they would have in the 28 percent bracket, the Republican aides said. That limit, which would raise $584 billion over 10 years, would affect charitable contributions, municipal bonds and other items, and hasn’t advanced in Congress.

Obama’s offer included elements that hadn’t previously been publicly under consideration. His proposal would end three recurring debates in Congress over expiring provisions.

The President’s plan would permanently extend an annual “patch” that prevents expansion of the alternative minimum tax. He would end a payment cut to doctors under Medicare. Also, he would permanently extend dozens of tax breaks that routinely expire, such as a research-and-development tax credit and a deduction for state and local sales taxes.

Achieve Savings
His plan would achieve $400 billion in savings from health programs, $200 billion from other so-called mandatory spending and another $200 billion from other programs, half in defense.

About $130 billion of the savings would come from switching the way annual inflation increases for Social Security benefits are calculated. Obama’s offer would include protections for the most vulnerable recipients, said the person familiar with the talks.

“Any movement away from the unrealistic offers the President has made previously is a step in the right direction, but a proposal that includes $1.3 trillion in revenue for only $930 billion in spending cuts cannot be considered balanced,” Brendan Buck, a Boehner spokesman, said in a statement.

“We hope to continue discussions with the President so we can reach an agreement that is truly balanced,” Buck said.

The Republican calculation doesn’t count $290 billion in lower interest payments as part of the spending cuts, as the White House totaled them. Interest savings are a byproduct of both tax and spending decisions.

‘Good News’
Obama and Boehner met Monday at the White House for the third time in nine days, and they were joined by Treasury Secretary Timothy F. Geithner.

“They are way aways from a deal yet, but they are talking,” Senator Saxby Chambliss, a Georgia Republican, told reporters after leaving a meeting with Boehner on Monday. “That’s the good news.”

If Obama and Boehner reach a deal, it will take days to draft legislation, sell it to lawmakers and pass it. Senate Majority Leader Harry Reid, a Nevada Democrat, said senators would probably convene Dec. 26 to consider budget measures.

The Standard & Poor’s 500 Index increased 1.2 percent to 1,430.36 at 4 p.m. in New York Monday, marking the measure’s biggest gain since Nov. 23. Treasuries slid, and the yield on the 10-year benchmark note climbed seven basis points, or 0.07 percent, to 1.77 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices.

Political Challenges
Boehner and Obama each have political challenges as they try to wrap up a deal.
Boehner must secure enough savings from entitlement programs to placate Republicans, who are demanding a high price for reversing their opposition to increased tax revenue.

Boehner last week offered to tax annual incomes exceeding $1 million at 39.6 percent, the top rate Obama is seeking.

The Heritage Foundation, a Republican-leaning Washington policy group, called Boehner’s latest plan “infuriatingly frustrating to conservatives, again.”

Some House Republicans, including Representative Tom Rooney of Florida, say they could support higher tax rates on income above $1 million in exchange for an overhaul of entitlement programs.

“If we can get some kind of compromise and some kind of deal and get our approval rating above 9 percent,” Rooney said in an interview yesterday, “then you are going to have to compromise against what you believe might be right or might be wrong.”

Tax Concessions
Conversely, Obama must get enough tax concessions from Boehner to satisfy Democrats who say that the president would get the tax rate increases he wants by waiting until Jan. 1. That’s when the tax cuts expire and Obama could pressure Congress to cut rates on income of individuals below $200,000 and married couples below $250,000.

The proposed inflation gauge, known as chained CPI, would reduce scheduled benefit increases and annual adjustments in tax brackets, subjecting more income to higher rates.

AARP, the lobbying group for senior citizens, opposes the change, which it calls a benefit cut that would most affect the poorest seniors.

The President also wants to replace the expiring payroll tax cut with other stimulus measures such as infrastructure spending; Boehner doesn’t.

“The longer this runs, passing a big deal becomes more challenging on all fronts,” said Siddiqui, now a lobbyist at Akin Gump Strauss Hauer & Feld LLP in Washington.

—With assistance from James Rowley, Heidi Przybyla, Roxana Tiron, Roger Runningen, Margaret Talev and Kathleen Hunter in Washington

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