December 7, 2010 / 7:27 PM / 8 years ago

Analysis: Obama's tax deal a sign of more compromise to come

WASHINGTON (Reuters) - President Barack Obama’s tax deal with the Republicans is a clear sign he will make policy compromises that could boost his chances of re-election in 2012 despite leftwing fury that he is giving up too much.

Obama this week dropped his earlier steadfast opposition to allowing tax breaks for the wealthy and made other concessions, bowing to the new political reality after Republican made big gains in last month’s congressional elections.

Anger from the left would have come as no surprise to the White House, but analysts said acting as a bipartisan president should win Obama support from the center.

And though the deal was greeted with glee on Wall Street, experts will be watching closely to see what Obama does to tackle a yawning budget deficit, an issue that will be a huge part of the political debate ahead of the 2012 campaign.

After the election setback, Obama has likely decided to work with Republicans in Congress rather than oppose them over the next two years, said William Galston, an analyst at the Brookings Institution who was a policy advisor to former Democratic President Bill Clinton.

“I think the president asked himself a very hard-headed question, namely how can I get the most of what I want and what the country needs in these changed political circumstances? And I think the conclusion that he reached was the logical consequence,” he said.

Obama announced on Monday he had reached a tentative agreement with Republicans to renew Bush-era tax cuts not just for middle-class Americans, but also for the wealthy, which are due to expire at the end of the month.

It was a retreat from his insistence that the country could not afford tax breaks for millionaires as it battles record deficits.

The pact includes measures to help those who are less well off, including a 13-month extension of unemployment benefits, which should help placate Democrats. But Obama will have to fight for his own party’s support to get it through Congress.

The New York Times blasted the tentative deal in an editorial on Tuesday as “a win for the Republicans and their strategy of obstructionism and a disappointing retreat by the White House.”

Wall Street applauded. U.S. stocks jumped to a fresh two-year intraday high as investors bet the agreement would prompt increased spending to help the economy and lessen chances investors would sell shares.

TOWARD THE CENTER

The agreement moved Obama toward the political center and sent the message that he is willing to give in to the unbending right to achieve his primary goals of helping needy Americans and bolstering the economy.

“Clearly his base is going to be disappointed but I don’t think he has much choice given the political realities after the mid-term elections,” Republican strategist Alex Conant said.

“Voters sent a clear signal that they didn’t want bigger government and higher taxes, and he doesn’t have much support in Congress for raising taxes.”

The deal could woo back independent voters, who shifted their allegiances away from Democrats in last month’s vote, when Republicans won control of the House of Representatives and cut the Democratic majority in the Senate.

Experts said that in the run-up to the 2012 campaign Obama would benefit from positioning himself as a leader who is willing to make tough decisions — and portraying Republicans as ideologues who are unwilling to compromise.

“Unfortunately, he (Obama) acquired the reputation for being something of a pushover. He’s got to re-engineer that image, to say that he was the reasonable one, the Republicans were rigid and unyielding,” said Ross Baker, a professor of political scientist at Rutgers University in New Jersey.

The tax deal — which will cost billions of dollars — also puts added pressure on the administration to tackle the $1.3 trillion budget deficit. Obama is expected to spell out a plan for closing the budget gap, perhaps in his State of the Union address, which usually takes place at the end of January.

How to address the deficit will be a big part of the political debate in the next two years, and Obama must show he is on the right side of it, despite having agreed to an expensive tax cut extension for the wealthiest Americans.

“My hope is that the president no later than the State of the Union will announce an integrated strategy in which this deal will only be the first and probably the least important step,” said Galston, who described himself as a deficit hawk.

“It’s defensible in that context. If it’s not in that context, it will jut be another troubling chapter in the ongoing story of kicking the (debt) can down the road,” he said.

Editing by Alistair Bell and David Storey

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