Washington reaches Christmas compromise on payroll tax cuts – for now. How does the outcome affect you?
President Barack Obama won his battle with the House of Representatives to pass a two-month extension to impending payroll tax cuts that were due to expire at the end of the year.
House Republicans had argued that the Senate bill – negotiated in a bipartisan effort by Mitch McConnell and Harry Reid and approved with broad bipartisan support – is a short-term fix for a long-term problem.
Millions of middle-class Americans still stand to be affected if the deal is not negotiated before March, and the "optics" – as Washington people like to say these days – look bad for Republicans.
But how does the ongoing debate affect you? Here's a Guardian primer:
What is payroll tax?
It's the tax levied to pay for both the social security retirement fund and for Medicare, the federal-funded health plan. The current rate is 4.2%, following a temporary 2% tax cut that was passed before the Republicans took charge of Congress. The cut saved 160 million Americans an average of $1,000 a year, and was meant to give the economy a boost as the US fought its way out of recession.
It sounds like a good idea. What is the disagreement?
The economy is officially out of recession, but is still far from robust. Obama has won a two-month extention on the payroll tax cuts. The cost to extend the payroll tax break for employees at current levels is $119.6bn. Not all economists agree that payroll tax cuts really help, but politicians on both sides want to extend them. Having been sceptical of the tax cut's benefits, Republicans now want a one-year extension. The Democrat-controlled Senate passed a two-month extension proposed by Obama with the support of 39 Republicans. That extension was paid for by increasing the fees the giant government lenders Fannie Mae and Freddie Mac charge lending firms for backing mortgage loans.
So there isn't an argument?
Oh, but there is. Republicans who control the House of Representatives tried to block the Senate deal. The fight looks set to be one of the defining arguments of 2012's election year – their capitulation to Obama's proposed extension represents a sorely-needed victory for the president. But the core disagreement remains: how to pay for the extension. Democrats have previously proposed a tax increase on personal incomes over $1m. Republicans want spending cuts, and are set against a tax on the rich.
What happens if no deal is done?
At the end of February, payroll tax paid by 160 million workers will rise by 2% to 6.2%. The rise would cost people making $50,000 a year about $1,000, or about $19 weekly. Three million people currently receiving long-term jobless benefits will also begin to lose weekly payments that average under $300.
And the wider economy could suffer too: Mark Zandi, economist at Moody's Analytics and an adviser on the 2008 presidential campaign of senator John McCain, has said the economy could fall back into recession if the payroll tax cut is not extended.
What is the compromise?
Senate minority leader Mitch McConnell has negotiated a two-month extension and now demands the Democratic-run Senate agree to negotiate a year-long extension.
So what will happen?
Obama has won this game of chicken, but the larger battle remains unresolved. Republicans are trying to make the compromise sound like it was their idea in the first place so it looks like the argument is already won. But as the battle over the debt ceiling showed, this won't be over until it's over.