Early "fiscal cliff" talks show possible path to deal

U.S. President Barack Obama holds up a signature pen as he delivers a statement on the U.S. ''fiscal cliff'' in the East Room of the White House in Washington, November 9, 2012.

WASHINGTON (Reuters) - President Barack Obama and top lawmakers agreed on Friday to work on a framework for reforming the U.S. tax code and "entitlement" programs next year, in what could be an important first step in averting the upcoming 'fiscal cliff."

While the congressional leaders and the president had spoken individually in the past week in public statements about a construct for going forward, Friday's session marked the first time they sat in a room together and struck a similar chord.

An agreement to discuss tax and entitlement reform, most pressingly Medicare, the health program for the elderly, would not be sufficient to solve the more immediate problem of averting the fiscal cliff, the broad tax increases and spending cuts set to start in January.

But a promise for the future is seen as necessary to convince members to compromise in the here and now, probably by replacing the relatively extreme fiscal cliff measures with less harmful deficit-reduction steps.

The development came during the first meeting between Obama and Republican and Democratic congressional leaders since the election. Attending were the president, Boehner, Republican Senate Minority Leader Mitch McConnell, Democratic Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi.

Following the hour-long White House meeting, Boehner said at he had "outlined a framework that deals with reforming our tax code and reforming our spending."

A Boehner aide, who asked not to be identified, said later the spending cuts would cover "entitlements" - the large federal benefit programs that include Medicare healthcare for the elderly and Medicaid for the poor.

"This is a construct all present (in the White House meeting) agreed was needed," the aide said.

A Democratic aide, who also asked not to be identified, did not dispute that tax and entitlement reforms had to be worked on next year.

The aide added that the "key discussion right now" is what to do about across-the-board income tax rates that will rise in January if Congress cannot agree on a new deficit-reduction deal.

"The major development of the meeting was we made it clear our position is ... we should freeze tax rates for the middle class and raise rates on the top (income) families," the Democratic aide said. "It was notable that neither Boehner nor McConnell shot that idea down."

SIGNS OF COMPROMISE?

While great uncertainty remains, Friday's steps were not insignificant.

Obama's core supporters, who turned out in droves to ensure his re-election, are already fighting hard to protect benefit programs for the poor, disabled and elderly that Republicans want to cut because of their rising costs.

It is therefore meaningful that Democratic leaders at least say those entitlements are open for discussion.

Conservatives in Congress bristle at the notion of raising any income tax rates, including for the wealthy.

After decades of Republicans insisting that Washington had a spending problem, not a revenue problem, the Republican leaders are at least now saying they are prepared to put revenues on the bargaining table.

Details, which have wrecked deficit talks in the past, are missing. On the entitlement cuts, for example, would they primarily hit middle-class beneficiaries, wealthy participants, or medical providers such as hospitals?

In public, the Republican leaders did not say whether the offer to negotiate on revenues meant merely closing some tax loopholes benefiting special interests and counting on future revenue growth from an improving U.S. economy or, whether as Democrats hope, they were signaling they might finally say yes to raising tax rates on the rich.

Reid and Pelosi, said a senior Senate Democratic aide, "feel they're making progress (with Republicans) on tax cuts for the rich." The aide predicted that "there will be some back and forth" in coming weeks before Republicans finally succumb.

How far any of the talking goes will not be known until Congress returns in late November from a Thanksgiving holiday recess and the real, nitty-gritty negotiating begins.

REID GAUGING OBAMA'S "SPINE"

Reid and Obama huddled in the White House earlier this week alone, without any aides present.

According to a source who did not want to be identified, Reid wanted to gauge Obama's spine - whether he would stand firm on raising taxes for those families with net incomes above $250,000.

For many Democrats, December 2010 was all too painful a memory, as Obama caved in to Republican demands that all tax cuts, including those for the richest, be extended through this year.

The source said Reid left that meeting convinced the newly re-elected president would stand firm.

That gave Reid the confidence he needed to assure rank-and-file Democratic senators, the source added. Without those assurances, there was no way Reid could begin preparing his members for the Medicare cuts that could lie ahead.

So lawmakers have gone home for the holiday on an upbeat note but knowing it will be tough to hammer out a December deal.

Reid returned to the Capitol on Friday telling reporters that "there were no harsh words" uttered during the White House meeting - a big accomplishment on the heels of a bitter election season.

(Additional reporting by Thomas Ferraro; Editing by Fred Barbash and Peter Cooney)