Dems signal Obama flexibility on spending in talks

That was a reference to the third ingredient under negotiation as part of deal to prevent the economy from reaching the fiscal cliff — an increase in the government's borrowing authority.

After a brush with the first-ever default by the Treasury in 2011, Obama is demanding that any fiscal cliff compromise give him authority to raise the current $16.4 trillion cap without a prior vote by Congress. Officials say that Boehner's most recent proposal would grant an increase equal to the size of any spending cuts, roughly $1 trillion under his own recommendations.

The speaker made his offer to Obama late last week, dropping his blanket opposition to the president's call for an increase in the tax rate paid on upper incomes. Obama, however, wants rate increases to begin at income levels of $200,000 for individuals and $250,000 for couples.

Officials have said Boehner offered a total of $1 trillion in higher revenue, less than half of which would come this year, and the balance in 2013 as part of a bill to overhaul the tax code.

Some of the increased revenue to be provided immediately would come from setting the tax rate on income over $1 million at 39.5 percent, up from the current 35 percent. The balance would come from higher taxes on capital gains, dividends and other provisions.

The proposal to scale back cost-of-living increases is a regular at deficit reduction talks.

Obama tentatively agreed to back it more than a year ago in talks with Boehner that eventually collapsed, although he sought steps to shelter the lowest-income beneficiaries from its effects.

Democrats have said they would object much more strongly if the president would to accept a plan to raise the Medicare eligibility age from 65 to 67. He was ready to embrace that proposal in the earlier round of talks, but he would face opposition from congressional Democrats and the AARP as well as other groups in the current political climate.

The new inflation adjustment would create government savings of an estimated $168 billion over a decade, according to a recent estimate by the Congressional Budget Office. It also would raise tax revenue by $54 billion by affecting the adjustment in income tax brackets that occurs annually to take inflation into account, CBO said.

Associated Press writers Ben Feller, Andrew Taylor and Stephen Ohlemacher contributed to this story.