Analysis: Obama wins on tax cut, but gains are hard to sustain

Reuters News
Posted: Dec 23, 2011 5:23 PM
Analysis: Obama wins on tax cut, but gains are hard to sustain

By Alister Bull and Caren Bohan

WASHINGTON (Reuters) - For President Barack Obama, it was a political victory that has given his 2012 re-election campaign an identity: champion of the middle class.

In facing down Republicans over a two-month extension of the payroll tax cut for 160 million Americans, Obama managed to cast conservative Republicans in the House of Representatives as symbols of the dysfunction that often has paralyzed a divided Congress.

But in the months ahead, the president will face huge challenges in maintaining the momentum he now enjoys.

The debate over a longer extension of the payroll tax cut -- and extended unemployment benefits for millions of Americans -- will come up again shortly after Congress returns from the holiday recess.

In Round Two, Obama and Democrats almost certainly will face a better-organized opposition. The Republicans likely will be determined to fight for more budget cuts and to preserve existing tax breaks for the wealthy that the Democrats want to end -- before agreeing to extend the payroll tax cut through 2012.

Obama also is likely to face a more united Republican Party beyond Washington.

The tax cut debate in Congress this week took place as the Republican candidates for president were bashing one another in Iowa and New Hampshire, states that vote early in their party's nomination process.

As 2012 goes on and Republicans settle on a presidential nominee -- former Massachusetts governor Mitt Romney is seen as the favorite despite his struggles so far in the campaign -- the party will be more unified in targeting Obama, analysts say.

Obama's run to re-election also could be derailed by the fragile economy, which in recent months has shown signs of recovery as some real estate and labor markets have stabilized.

But the nation's unemployment rate is still at 8.6 percent, which could mean trouble for the president's re-election prospects.

In an interview with Reuters on Thursday, Romney made it clear that his campaign would focus on what he called Obama's failure in dealing with jobs and the economy.

Obama is likely to face the question that Republican Ronald Reagan posed to voters in his first successful run for president in 1980 against Democratic incumbent Jimmy Carter: Are you better off now than you were four years ago?

"In the end, that Reagan question ... will still be the question that people are going to debate when they vote in November of 2012, unless the Republicans put up an unacceptable alternative," said Stephen Wayne, professor of government at Georgetown University.


Before leaving Washington on Friday to join his family for a holiday vacation in his native Hawaii, Obama laid the groundwork for his next round with Republicans in Congress -- and made it clear that his populist theme would continue.

He called on Congress to work "without drama, without delay" to extend the payroll tax cuts and unemployment benefits for a full year.

And Obama -- who received more than 30,000 responses on Twitter, Facebook and e-mail after asking Americans what they would do with about $40 per biweekly paycheck in savings from the tax cut -- thanked them for writing.

The year ahead, he said, would be a "make or break moment for the middle class in this country," making it clear that he would cast himself as their defender.

By striking a populist chord to build public support against compromise-resistant House Republicans aligned with the conservative Tea Party movement, Obama ended what essentially was a year-long losing streak.

Time after time this year, Obama and Democrats backed down to Republican demands for spending cuts, moves that analysts say had begun to demoralize some Democrats and make Obama appear weak.

The glow from this week's success will fade soon, analysts say, unless Obama manages to find new ways to feed his populist narrative.

"The memory of any given stand-off between a president and Congress is very, very short," said Ross Baker, a political science professor at Rutgers University in New Jersey.

"He has got to be able to capitalize on future opportunities, or create future opportunities, in which he can move forward (with) this narrative which is so positive for him," Baker said.

Tax cuts put in place under Obama's Republican predecessor George W. Bush that expire at the end of 2012 could provide another battleground for Obama to emphasize his middle-class platform, analysts said.

Republicans favor extending such cuts for everyone. Obama and Democrats want to extend them for everyone except households that make more than $250,000 a year.

Republicans say that such a move would kill jobs and harm small businesses. Obama argues that the wealthy are not paying their "fair share" of taxes.

In 2012, "I think (Obama) just continues to pummel the House Republicans and challenge the Republican leadership ... making it seem they are they are grinches that want to steal Christmas," said Richard Parker, a professor of public policy at Harvard's Kennedy School of Government.

Obama may need such tactics to work if the economy stalls, analysts say.

A year-long extension of the payroll tax cut and extended unemployment benefits would put more than $100 billion into the pockets of American households in 2012. That is significant money, but modest in the context of the overall U.S. economy.

A range of events -- including fallout from a debt crisis in Europe or another spike in gasoline prices because of tensions in the Middle East -- could wipe out the benefit of tax cuts, analysts say.

Economic growth -- a sluggish 1.8 percent in the third quarter -- also could weigh on Obama next year if it does not improve, the analysts say.

"Unless he has got this economy cooking at 3 percent (growth) or more by June," Parker said, "the subtext of this election is going to be, 'Can you get this out of this mess?'"

(Additional reporting by Laura MacInnis in Washington and Eric Johnson in Chicago; Editing by David Lindsey and Will Dunham)