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Explaining the GOP’s Payroll Tax Cut Surrender

Daniel Gross

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Is this how it ends? With a whimper, not a bang?

I'm talking, of course, of the epic beltway battle that was shaping up over the extension of the payroll tax holiday.

At the end of 2010, the White House and Congress agreed to temporarily reduce the payroll tax from 6.2 percent to 4.2 percent for 2011. As 2011 careened to a close, the White House and Republicans in Congress agreed to extend the temporary tax cut into 2012 — but only for two months. The two parties simply couldn't agree on how — or whether — to offset the revenue likely to be lost as a result.

That set the stage for yet another drama-filled set of negotiations. After all, for much of the last three years that's how things have gone. Republicans react tepidly, or angirly, to anything that President Obama proposes. After engaging in lengthy, drawn-out negotiations, and they either vote en masse against it (the health care bill), or exact painful concessions in exchange for a deal (the debt-ceiling extension). And with the cut slated to expire on March 1, the clock was ticking.

But on Monday, in a move that surprised most analysts, Republican Congressional leader said they'd be willing to extend the tax cut through the end of 2012 without asking for spending offsets.

In the accompanying video, Henry Blodget, Zachary Karabell and I discuss the implications of this maneuver.

The most obvious conclusion is that Congressional Republicans, having taken a beating for their reluctance to extend this tax on wages last year, simply don't want to have another argument on the subject. "When most people perceive the economy to be underwater, you can't run" against a tax cut that benefits people who rely on wages for their income, said Karabell, an economic analyst, historian, and contributor to the Daily Beast. Removing this item from the legislative agenda sooner rather than later allows them to focus on other topics on which they may still have an advantage, such as the deficit, entitlements, or President Obama's just-released budget.

Still, the move represents a strange and seemingly sudden shift in Washington dynamics. For the last few years, Congressional Republicans have thrived on — and generally benefitted from — a steadfast unwillingnes to do business with President Obama on anything but their own terms. Many are on record as saying that the payroll tax doesn't help the economy much, and that their greatest desideratum is reducing the deficit. And, to take an entirely cynical view, in this election year, as Zachary Karabell, notes, the Republicans have the most to gain from a weakened economy. "If you're a republican running for office this year, you just don't want the economy getting better," he notes. "It's a terrible thing to say, but it's politically true."

Yet Congressional Republicans — or at least their leaders — seem prepared to hand President Obama a legislative victory that will raise the deficit, and help boost demand in the months leading up to the economy — all without forcing Democrats into a series of painful and embarrassing concessions.

Daniel Gross is economics editor at Yahoo! Finance

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com