Fresh off big victories on Election Day, Republicans in Congress feel empowered in their fight to extend tax cuts that expire in January, including those for the wealthy.
President Barack Obama has said he wants to compromise with Republicans to ensure that tax cuts for middle-income families continue, suggesting he's open to extending all the tax breaks for a year or two. Republican leaders say it's a nice gesture by the president, but some key GOP lawmakers want more.
"It should be permanent," said Sen. Judd Gregg, R-N.H. "We've got to get this economy to pick up and if you raise taxes you're going to stifle the economy significantly. I'm sure that somebody's explained that to the president."
Rep. John Boehner of Ohio, who's in line to be the next House speaker in January, also played down talk of a compromise.
"I think that extending all of the current tax rates and making them permanent will reduce the uncertainty in America and help small businesses to create jobs again," Boehner said. "You can't invest when you don't know what the rules are."
Democrats will have majorities in both the House and Senate when Congress returns this week for a lame-duck session that is expected to stretch into December. They will need Republican support to get the 60 votes necessary to pass a tax bill in the Senate.
Obama and Democratic leaders in Congress want to make the tax cuts permanent for lower- and middle-income families, while letting them expire for individuals making more than $200,000 a year and married couples making more than $250,000. Republicans want to make the tax cuts permanent for everyone.
Many congressional aides, both Republican and Democrat, think lawmakers will settle on a temporary extension of all the tax rates, perhaps for a year or two. While some Democrats have supported the idea, interviews with lawmakers and aides from both parties suggest that compromise won't be easy.
Republicans are itching for a tax fight. They believe voters punished Democrats for increasing the size of government, and are looking forward to next year when the GOP will control the House and have more seats in the Senate.
Democrats must balance the interests of liberals who are dead set against extending tax cuts for the wealthy -- even for a short time -- with the more conservative in their ranks who don't want to raise taxes on anyone in a bad economy.
Clouding the issue is whether Democrats who lost at the polls will have the stomach for one last knockdown debate before they leave office.
An impasse would mean all the cuts could expire in January, at least temporarily, resulting in significant tax increases for families at every income level.
The tax cuts enacted under the Bush administration in 2001 and 2003 reduced marginal income tax rates at every level. They also provided a wide range of income tax breaks for education, families with children and married couples.
Taxes on capital gains and dividends were reduced, while the federal estate tax was gradually repealed, though only for 2010.
Obama's plan to make the lower- and middle-income tax cuts permanent would add a little more than $3 trillion to the national debt over the next decade, according to congressional estimates. Extending tax cuts for the wealthy would add $700 billion more.
The sticker shock of adding nearly $4 trillion to the national debt has some Democrats wary of making any of the tax cuts permanent, especially after Obama's deficit commission issued a report last week outlining painful spending and tax proposals to rein in the government's finances.
Republicans are less concerned about adding to the debt through tax cuts, despite criticizing deficit spending.
This week, lawmakers will try to start laying the groundwork for a deal in private party caucuses and at a White House meeting Obama is hosting for leaders. Action in the House and Senate probably won't happen until after Thanksgiving.
Obama said Friday in South Korea that his goal remains extending the middle-class tax cuts and that the nation cannot afford the cuts for the wealthy. "My hope is, is that somewhere in between there we can find some sort of solution," he said.
Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, is pushing a plan that would make the middle-income tax cuts permanent while extending those for the wealthy for just a few years.
The idea, however, is falling flat among Republicans who don't want to lose their leverage on extending all the tax cuts.
"That's a tax increase plain and simple that would be used to fund more Washington spending and would discourage private-sector job growth," said Sen. Orrin Hatch, R-Utah.
Hatch and Senate Republican leader Mitch McConnell of Kentucky have said they are open to a temporary extension of all the tax cuts. Hatch would like to extend them beyond the next presidential election in 2012.
"We would welcome the president's help to extend all the current tax rates so that no one sees a tax hike." McConnell said. "There is no reason we can't work together to prevent equally a tax hike on families and small businesses."
(This version CORRECTS to show that the Obama meeting is expected sometime this week, not necessarily on Thursday. Corrects to show Hatch and McConnell are open to a temporary extension, not that they have agreed to one.)