The fight over the payroll tax cut accomplished almost nothing in terms of real world policy changes, but has provided the president with a huge political victory heading into 2012. Not only did Speaker of the House John Boehner take a stand on an issue that almost no one was against (lower taxes), he lost the fight in a manner suggesting he can't control his own party members.
The standoff was largely the result of two key miscalculations. One was that the popular and useful payroll tax cut was worth sacrificing for some vague strategic gain. No one wanted the payroll tax cut to go away and many Senate Republicans desperately needed it to stay intact. The Senate bill passed by a vote of 89-10, an unheard of landslide in this day and age. Yet the House thought this was the time to stand athwart history and say "stop"?
Who Boehner should have been standing up to was his own party members, particularly the freshman Tea Partiers who complained the loudest about the Senate deal. He's smart enough to know the issue was a loser politically, but he gave into the anger of his party members whose main objection — a two-month extension vs. a one-year extension — was a rather trivial matter that in the long run would make no difference. (Saying you love a policy so much that you're willing to let die completely does not come across as rational thinking.) The cut was going to be extended one way or another and no concessions they could have wrung out of Democrats would be worth the cost of letting the cuts expire.
The choice to not quiet his own party members was born out of the second mistake, which was believing that if the Congressional Republicans simply flexed their muscles once again, President Obama (as he had more than once before) would cave. Unfortunately, for them, they finally found an issue that dovetailed perfectly with the message he's been pushing on middle class Americans for months: Republicans only want tax cuts when they're for rich people.
Unlike the debt ceiling fight in August, which was a technical matter that the GOP was able to frame as a simple argument over spending, the payroll tax was a very simple matter that Republicans could not spin any other way. If they didn't pass it, taxes were going up. And it would be the Republicans' fault.
In short, the president had never been in a better position politically and it was never clear what the Republicans thought they would be gaining by forcing his hand. (The "concession" they got from the Senate about filing requirements for businesses only made the standoff seem more petty.) Even more galling to the Republicans would be the suggestion that Obama's previous capitulations set them up for this embarrassing defeat; one that comes much closer to the pivotal 2012 election. Giving in on the Bush tax cuts last winter is what allowed the payroll tax cut to be implemented in the first place; and the debt ceiling deal, while offensive to many of Obama's supporters, took the issue off the table until after the election. Practically he gained very little from this fight, but Obama has now given Republicans — and most Americans — something to think about the next time they try to bluff him.
A full extension of the payroll tax cut still has to be negotiated, but the Republicans just lost much of their leverage by proving that they can't afford to let it die. Meanwhile, the President looks strong for the first time in a long time, the Republican party seems divided and clueless, and Boehner was literally forced to admit, “This may not have been politically the smartest thing in the world." Not a great way to end your year.