Debt talks to tackle taxes and spending caps

By Andy Sullivan

WASHINGTON (Reuters) – Top Democratic and Republican lawmakers met on Thursday to discuss taxes and other hurdles to a debt-reduction deal aimed at allowing the United States to keep borrowing money at rock-bottom rates.

As Vice President Joe Biden and six leading lawmakers gathered on Capitol Hill for a sixth round of talks, pressure is growing for an agreement that would let Congress raise the $14.3 trillion debt ceiling before an August 2 deadline.

Though bond markets remain placid, investors are increasingly alarmed that Congress will fail to act before that date, when the Treasury Department has warned it will run out of money to pay the nation’s bills.

Credit rating agencies have warned they could downgrade the ratings on U.S. Treasury bonds if the debt and deficit standoff is not resolved soon.

But many Republicans still believe that financial markets would be willing to accept a short-term default by the United States on its obligations if the White House and lawmakers reached agreement on its long-term deficit.

“Regardless of what the debt agencies say, the international financial community has to have confidence that the Congress of the United States is going to make the tough choices,” Republican Senator Tom Coburn told Reuters Insider.

Li Daokui, an adviser to China’s central bank, told Reuters in Singapore on Wednesday that he hopes U.S. lawmakers “would stop playing with fire.” China, the largest foreign creditor to the United States, holds about $1 trillion of the United States’ outstanding debt.

Many believe the bipartisan Biden talks are the best hope for a deficit-reduction deal. Opinion polls show Americans are deeply worried about the size of the U.S. deficit, which is expected to reach $1.4 trillion this year.

The White House is considering a temporary cut in payroll taxes that employers pay on wages, an administration official said on Thursday, as advisers to President Barack Obama discuss more ways to boost the economy.

It was not clear whether the proposal would be on the table in the Biden talks on Thursday.

Top Republicans have said that any increase in the country’s debt ceiling would have to be matched by an equal amount of spending cuts — roughly $2 trillion to ensure that Congress will not have to revisit the issue before the November 2012 elections.

Democrats say tax increases must be part of any deficit-reduction plan but Republicans have refused to consider them on the grounds they would hurt job creation.

Participants in the Biden group say they have made steady progress since talks began early last month, and have conditionally agreed on at least $150 billion in cuts.

Conscious of the potential for market chaos if there is not a deal soon, both Obama and House Speaker John Boehner, the top Republican in Congress, have said they would like to get a deal within a month.