The tax “compromise” plan’s two-year, two percentage point proposed reduction in social security payroll taxes deducted from employee’s checks will provide some economic stimulus.  It will also increase the social security deficit and the need for changes to bring the program into balance.  From a political perspective, it could prove very difficult not to extend the payroll tax cut beyond two years.  President Obama can be expected to propose making the cut permanent and replacing the revenue lost by increasing the employer’s share of the tax and by raising or even eliminating the limit on the amount of annual earnings subject to the tax, even though it would discourage hiring.

Assuming that the tax compromise passes, the stage is set for a battle in 2012 on two tax fronts: marginal income tax rates and social security taxes.  There will be two major sources of uncertainty confronting businesses and workers.  The President and Congressional Democrats will have two levers to press in their attempt to tip the median voter towards a lower tax burden for low-to-middle income people and higher taxes on higher income earners, including thousands of small businesses. Depending on what happens economically the next 18 months, this class warfare agenda may have more salience with independents in 2012 than it had in 2010.  In any case, liberals and pundits who call the tax compromise a major defeat for the President are less astute than he.