Obama’s evolution: Behind the failed ‘grand bargain’ on the debt

Lew’s comment referred to the collapse of secret talks a week earlier. Boehner had broken them off after word leaked that tax hikes were on the table. His caucus would not stand for them.

The tea party conservatives, who dominated the group of new House Republicans that gave the GOP a majority in the 2010 elections, were hellbent on preventing Obama from raising the legal limit on government borrowing — known as the debt ceiling — without deep spending cuts and a radical restructuring of expensive health and retirement programs. While its members had elevated Boehner to the speaker’s office, the tea party caucus, critical of Obama’s political agenda and elected to stop it, also proved to be Boehner’s biggest political challenge.

Their voice in the House leadership was Cantor, who also aspired to be speaker and had uneasy relations with Boehner. Publicly, Cantor was insistent that the House would never approve higher taxes. But the White House took his presence now alongside Boehner as a sign that the rift within the GOP had perhaps been patched and that talks could begin again in earnest. “We thought, ‘Okay, this is different,’ ” Daley recalled. “There was a perception from our end that, because Cantor was in the room, the people who blew up the first discussion may be able to be mollified.”

Cantor and Boehner brought their top aides, including Barry Jackson, the speaker’s chief of staff, who had worked in George W. Bush’s White House. When they reached Daley’s office, the Republicans were handed a four-page document that made changes, typed in red, to an offer Boehner had made two days earlier, during a secret meeting at the Capitol.

A lot of red ink, the Republicans thought. But the major elements of a bargain seemed to be falling into place: $1.2 trillion in agency cuts, smaller cost-of-living increases for Social Security recipients, nearly $250 billion in Medicare savings achieved in part by raising the eligibility age. And $800 billion in new taxes.

In Boehner’s offer Friday night, the taxes came with strings attached. The Republicans wanted Obama to give up plans to raise the tax rate paid by the wealthiest Americans, now set at 35 percent. Instead, they wanted that rate to go down. They also wanted to preserve low rates for investment income — one of the biggest perks for the wealthy in the tax code — and establish a blanket exemption from U.S. taxes for corporate profits earned overseas.

Another key caveat: Much of the $800 billion would have to come from overhauling the tax code — not from higher tax rates. The Republicans believed lower rates and a simpler code would generate new revenue by discouraging cheating and spurring economic growth. If the White House would agree to count that money, the Republican leaders said, then they might have a deal.

That last condition was a problem. For years, Democrats have mocked the Republican argument that tax cuts pay for themselves by boosting the economy, an assertion for which evidence is scant. Many independent budget experts say the effect, if it exists, would be almost impossible to measure and useless in crafting a budget. Fiscal “snake oil,” some Democrats say.