To bridge that impasse, the White House signaled a willingness to deal with the two income categories separately: permanently extend the tax rates for the middle-income brackets, and temporarily extend them for household income above $250,000 (or individual income over $200,000).
The GOP smelled danger, though, and balked. If the top rates are extended temporarily, and "decoupled" from the middle income rates, then Republicans have to fight, a year or two down the line, for tax cuts for the rich alone. So Republican leaders drew a line, and said they'd accept no compromise that didn't extend all rates for the same amount of time. This is where the White House has apparently decided to cry uncle.
"There are concerns," Axelrod said, that Congress will never let the high-income cuts expire under the GOP proposal. "But I don't want to trade away security for the middle class in order to make that point."
When Congress returns next week, Democrats will still have large majorities in both chambers. They could in theory put their plan forward and let the GOP decide whether or not to kill it -- resulting in tax increases for everybody.
But the strong implication here is that the White House takes Republicans at their word: they won't cave, so in order to avoid raising taxes on the middle class, we'll give in instead. The White House is strongly objecting to that reading. The problem is that's it's hard to read it any other way.