US president Barack Obama brushed aside opposition in his own party today and announced an agreement with Republicans on a plan to extend expiring income tax cuts for all Americans, renew jobless benefits for the long-term unemployed and grant a one-year reduction in payroll taxes.
The emerging agreement also included tax breaks for businesses that the president said would contribute to the economy's recovery from the worst recession in 80 years.
The debate over extending the Bush-era tax cuts has been the dominant political issue in Washington during the final weeks of the current session of Congress in which Democrats have big majorities in both chambers.
The agreement signalled the arrival of a new era of divided government following the November elections in which Republicans won control of the House of Representatives and cut into the Democrats' Senate majority.
Mr Obama's announcement marked a dramatic reversal of his long-held insistence, originally laid out in his 2008 campaign, that tax cuts should only be extended at incomes up to 200,000 dollars (£127,300) for individuals and 250,000 dollars (£159,200) for couples.
He explained his about-face by saying that he still opposed the move and noted that the agreement called for a temporary, two-year extension of cuts at all income levels, not the permanent renewal that Republicans had long sought.
Mr Obama also wanted to wrap up a deal on the tax cuts quickly to leave time for the Senate to debate and vote on a new nuclear arms control treaty with Russia, which the president has made a top year-end priority.
Senate Republicans have seemed more willing to hold a ratification debate in recent days as the negotiations over taxes intensified, suggesting at least an implicit link between the two issues in the talks.
Both parties have been under pressure from their bases not to compromise on the tax cut issue. Republicans insist that it makes no sense to raise taxes on anyone in a weak economy, but Democrats argue that extending tax cuts for the richest Americans would contribute to rising deficits and force deeper cuts in social welfare programmes.
Mr Obama found himself under fire from liberal Democrats who accused him of being too quick to cave in to Republican demands.
In a sign of Democratic discontent, Senate majority leader Harry Reid reacted curtly to the president's announcement.
"Now that the president has outlined his proposal, Senator Reid plans on discussing it with his caucus tomorrow," his spokesman Jim Manley said.
But top Republicans were far more receptive.
"I appreciate the determined efforts of the president and vice president in working with Republicans on a bi-partisan plan to prevent a tax hike on any American and in creating incentives for economic growth," said Senator Mitch McConnell of Kentucky, the Senate minority leader.
And in a jab at Democratic politicians, he added: "I am optimistic that Democrats in Congress will show the same openness to preventing tax hikes the administration has already shown."
Democrats also objected to an extension of the estate tax that tilted towards the Republican position.
For months Democrats have repeatedly raised objections to including upper-income Americans in any plan to extend tax cuts enacted in 2001 and 2003 when George Bush was president. The Democratic-controlled House of Representatives recently passed legislation to let the cuts lapse on incomes over 200,000 dollars for individuals and 250,000 dollars for couples. On Saturday, Republicans blocked an attempt by Senate Democrats to do the same.
But both parties realised they faced a potential political backlash if no deal was reached by the end of the year and taxes went up for all Americans.
Mr Obama said the continued political stalemate over taxes amounted to a "chilling prospect for the American people whose taxes are currently due to go up on January 1."
He said there were elements of the deal he personally opposed, including an extension of expiring income tax cuts at upper income levels and the more generous deal on estate taxes. But he said he decided that an agreement with Republicans was more important than a stalemate that would have resulted in higher income taxes at all levels on January 1.
"Make no mistake, allowing taxes to go up on all Americans would have raised taxes by 3,000 dollars (£1,900) for a typical American family and that could cost our economy well over a million jobs," he said at the White House.
Administration officials said the deal included an extension of unemployment benefits that Republicans had blocked. Officials said that under the plan, those benefits would remain until the end of next year for workers who had been jobless for more than 26 weeks and less than 99 weeks.