PRESIDENT Barack Obama and top Republican John Boehner met at the White House on Monday as hopes rose that Washington will be able to head off steep tax hikes and spending cuts that could push the economy into recession next year.
Aides from both parties said they were optimistic a deal could be reached in the coming days to avert the "fiscal cliff," as lawmakers set the stage for action before a year-end deadline.
"There's been too much progress at this point and neither guy wants to go over the cliff," a senior Republican aide said.
Although both sides still had major differences, investors were cheered by signs of progress.
The Standard & Poor's 500 index was up 0.72 per cent in late afternoon.
"I think there's a lot of expectation that a fiscal cliff deal of some sort does get done," said Joseph Benanti, managing director of Rosenblatt Securities in New York.
Senate Democratic leader Harry Reid said his chamber will wrap up work on the issue after Christmas.
"It appears that we're going to be coming back the day after Christmas to complete work on the fiscal cliff," he said on the Senate floor.
Boehner, the speaker of the Republican-controlled House of Representatives, has edged closer to Obama's demand to raise taxes on the wealthiest Americans.
In return, Obama is considering a measure that would slow the rate of growth of Social Security retirement benefits by changing the way they are measured against inflation, according to a Senate Democratic aide.
Getting closer on the taxes
In a step toward an agreement, Boehner has put forward a tax increase for those earning over $US1 million ($F1.77m) annually, while Obama wants that threshold set at $US250,000 ($F442,600).
Republicans could probably stomach a tax hike on incomes above $US500,000 ($F885,242), a Republican aide said.
The two sides face a deadline of December 31, when $US600 billion ($F1062b) in across-the-board spending cuts and tax hikes are due to begin kicking in, a jolt to the economy that could throw it back into recession.
Boehner's latest proposal calls for $US1 trillion ($F1.77 trillion) in new tax revenue, which would come from raising rates and limiting deductions that the wealthiest can take.
That is $US400b ($F707.8b) less than the White House wants, but the gap between the two sides has narrowed by half in recent weeks.
Boehner was expected to float the broad outlines of a deal with rank-and-file members yesterday. If there were no strong objections, he could try to finalise the deal today, the Republican aide said.
A Democratic aide said that if a deal is reached by Saturday night, votes could be held in Congress next week.
Both sides declined to say what Boehner and Obama discussed at the meeting, which was also attended by Treasury Secretary Timothy Geithner.
The White House said Boehner's latest proposal doesn't meet its standards.
"Thus far the president's proposal is the only proposal that we have seen that achieves the balance that is so necessary," White House spokesman Jay Carney said at a news briefing.
Republicans understand that the clock is ticking and they are confident that Boehner will get a deal they can support in the coming days, a senior House Republican aide said.
Boehner "won't sign off on a deal that doesn't have enough votes to get through," the aide said.
Republicans want substantial spending cuts in return for increased tax revenue, but any proposal to trim popular benefit programs like the Medicare health insurance plan for seniors will face fierce resistance from liberal Democrats, whose votes will be needed to get a deal passed.
Obama could also face strong opposition from Democrats if he agrees to Boehner's proposal to slow the growth of Social Security benefits by changing the way the cost-of-living increases are measured against inflation, an approach that could save $US200b ($F354b) over 10 years.
Obama also wants to head off another confrontation over the government's debt limit, which will need to be raised in the coming months. Republicans insist that any increase in the government's $16.4 trillion ($F29.03 trillion) borrowing authority must be paired with an equal reduction in spending.