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updated 11/15/2010 8:06:09 PM ET 2010-11-16T01:06:09

President Barack Obama's readiness to compromise with ascendant Republicans gets a test in Congress before the opposition party even takes control of the House of Representatives.

The single most explosive issue is the year-end expiration of significant tax cuts given Americans during the previous Bush administration. A decision on extending those tax breaks and which classes of taxpayers would benefit has fallen to a year-ending session of Congress, which opened Monday.

When he took office two years ago, Obama had the luxury of Democratic majorities in both the House and the Senate. Using that legislative advantage, Democrats, at the behest of Obama, passed major laws that created an $800 billion fund to revive the economy, overhauled the American health care system and changed government regulation of the U.S. financial system.

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That all ended on Nov. 2, when voters dealt a crushing blow to Democrats that ended their control of the House and sharply diminished their majority in the Senate.

Until the new Congress convenes next year, the old Congress has gathered for a final meeting and has a full agenda, taxes included, that may or may not be acted upon. The tone and tenor of what happens now could well provide a forecast for the coming two years leading up to Obama's run for a new term in 2012.

On taxes, Obama wants to make permanent cuts for couples earning less than $250,000 a year. While he campaigned on removing that break for wealthy taxpayers, he appears ready to compromise by temporarily extending the break for high earners for two to three years.

Buoyed by their coming advantage in the House and their current ability to use the Senate's arcane rules to snarl action there, Republicans have been holding firm on permanent extensions for all.

Absence of a tax agreement, however, could weigh heavily on politicians in both parties, who would be blamed for a higher tax bite for everyone. That is what probably will grease the wheels of compromise.

Republicans contend that increased taxes on higher wage earners and the wealthy would harm small businesses, the engine for economic growth and job creation in the United States. That is a strong argument for Americans facing stubbornly high unemployment, near 10 percent, and a struggling recovery from the worst U.S. economic downturn since the 1930s Great Depression.

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Democrats dispute the Republican claim and insist that expiration of taxes on upper income brackets would affect just 2 percent of Americans: the wealthy. What is more, the president and his party argue, an extension of breaks for upper-income brackets would force the government to borrow heavily, adding to an already unacceptable and spiraling U.S. debt.

The imperative for compromise showed on Sunday when two prominent Republicans conceded the best that Congress might be able to accomplish in the coming weeks would be a short term-continuation of the current tax rates.

"If the president wants to compromise on a two- or three-year extension ... if that's all we can get out of the president, and he is the president, so we'll work with him on that," said Sen. Jim DeMint, a South Carolina Republican and a leader of his party's conservative wing.

Sen. John McCain of Arizona, the Republican presidential contender in 2008, said he could foresee a short-term extension of all the tax cuts. McCain voted against the Bush tax cuts, saying they disproportionately benefited wealthy Americans and did not rein spending.

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Yet politics still loom.

Sen. John Boehner, who is expected to become speaker of the House in the next Congress, has said extending tax cuts for everyone "will be the most important thing we can do to help create jobs in the country."

That prompted Obama to reply on Sunday that that Republicans need to show him "how they intend to pay for it."

That could provide him a strong political argument against Republicans who also are taking control of the House on a promise of sharp reductions in the size of government and the amount of money it spends. Keeping taxes low while cutting the debt, Obama could argue, is a deep contradiction.

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Video: Bush tax cuts compromise likely

  1. Transcript of: Bush tax cuts compromise likely

    BRIAN WILLIAMS, anchor (Washington, DC): So again this new Congress starts work in January, that's what makes the current Congress a so-called lame duck Congress . But if they want to, they've got a lot of work to do, beginning with taxes. Our chief White House correspondent Chuck Todd here with us in the studio tonight. Hey, Chuck , good evening.

    CHUCK TODD reporting: Well, good evening, Brian . Look , the president is just back from his longest overseas trip of his presidency. It's a different Washington that he's

    returning to and he's now dealing with two Congresses: the Democratic one that's trying to leave, and the Republican one that's coming in. It's transition time in Washington . New members of Congress reporting in like new students at college.

    Unidentified Man: Congratulate him on his re-election?

    TODD: And old members of Congress coming back to wrap up unfinished business. First up, what to do about Bush era tax rates scheduled to expire at the end of the year. If Congress does nothing, rates will go up for most tax payers. For those making less than $250,000, the tax rate could be as high as 31 percent. And for those making more than that, some rates would hit almost 40 percent.

    TODD: The White House and members of both parties have signaled a compromise is imminent.

    Mr. DAVID AXELROD (White House Senior Advisor): We are eager to sit down and talk about how to move forward.

    Senator JIM DEMINT (Republican, South Carolina): Well, if that's all we could get out of the president, and he is the president, so we'll work with him on that.

    TODD: Senator Charles Schumer suggested only increasing taxes on the highest earners, raising the threshold to a million dollars instead of $250,000.

    Senator CHARLES SCHUMER (Democrat, New York): Everyone below a million dollars will get a tax cut , but the millionaires and billionaires won't.

    TODD: But some Democrats are concerned Schumer 's plan redefines middle class as anyone not making a million dollars or more, and that could make lawmakers seem out of touch. Bottom line, everyone involved expects a quick compromise that extends the tax rates for at least one year.

    Mr. STUART ROTHENBERG (Political Analyst): We will have gridlock sooner rather than later. But in the near term, the public wants the parties to play nice with each other.

    TODD: Meanwhile, the tea party effect is already being felt. Republican Senate Leader Mitch McConnell , reversing his position, said he now supports banning congressional earmarks, the practice of a lawmaker setting aside federal tax dollars for pet projects at home.

    Senator MITCH McCONNELL: I'm not wild about turning over more spending authority to the executive branch, but I've come to share the view of most Americans that our nation is at a crossroads.

    TODD: Now look, this was a very reluctant move by Mitch McConnell , Brian . Part of it is that he didn't want to start off with a divided Republican caucus . He'd rather see the Democrats look divided at this point in time. By the way, the White House , not just on tax cuts are they worried about in this lame duck Congress , they're very concerned about trying to get this new nuclear arms treaty with Russia ratified. They don't think they can get it ratified with the incoming Senate . They have to do it with this one.

    WILLIAMS: Talk about big ticket items awaiting. Chuck Todd , our White House correspondent, with us here tonight. Chuck , thanks.

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