• The current marginal tax rates of 10, 15, 25, 28, 33 and 35 percent would remain unchanged;
• The tax rates on dividends would remain unchanged at 15 percent;
• The tax rate on capital gains would remain unchanged at 15 percent;
• The alternative minimum tax (AMT) would be temporarily “fixed” by indexing to inflation to prevent more Americans from owing AMT; and
• The top estate tax rate would be 35 percent after a $5 million per person tax-free allowance, instead of reverting to 55 percent.

This part of the deal is more or less what the Republicans sought. To agree to it, President Obama and the Democrats exacted a compromise from the GOP: an extension of unemployment benefits to the long-term unemployed for an additional 13 months.

This is the basic deal I expected, with the exception of the one-year payroll tax holiday. The 12.4 percent payroll tax to fund Social Security and Medicare is currently split 50-50, with 6.2 percent paid by employees and 6.2 percent by employers. The amount is deducted from paychecks earned by every worker on the first $106,800 of their annual income.

In addition, the economic stimulus package passed in early 2009 included the “Making Work Pay” initiative, which gave workers a tax credit against their 6.2 percent share of the payroll tax. The size of the credit varied based on how much each individual earned and was eliminated entirely for those making over $75,000. This special credit was due to expire at the end of the year, and the President had sought to extend it.

The payroll tax holiday proposed as part of this compromise would reduce the individual’s share of payroll taxed by 2 percent for 2011 only and would apply to all Americans. For those earning less than $40,000 this would mean an $800 tax reduction for 2011; for those earning $106,800 or more that would mean a $2,136 tax cut next year. Those in between these two levels would see a tax reduction equal to 2 percent of wages.

The Making Work Pay credit was unpopular with Republicans because it involved giving tax credits to individuals who pay little or no taxes. Many on both sides felt that it was cumbersome and preferred an immediate tax cut visible on paycheck statements. But leaving these debates aside, the important thing about the payroll tax holiday is that it will cost $120 billion for 2011 alone and is, therefore, a much larger stimulus measure than Making Work Pay.

Getting this compromise through Congress will be a bit of a challenge and should provide some political theatre in the near term. Already, many Democrats have spoke against the deal, stating that the President gave too much away in the compromise.

Nonetheless, I believe it will pass Congress. President Obama himself was intimately involved in negotiating the terms of the compromise and has firmly put his weight behind this package. He’s unlikely to back down from that position, and many in his party will ultimately follow his lead. In addition, the deal includes some major carrots for Democrats, including the long-sought extension of unemployment benefits.

This is a positive for the stock market. Uncertainty about taxes going forward has been an issue for individuals and businesses alike; as I have long said, a failure to reach a deal was the biggest near-term risk to the economy. The still-fragile recovery could not withstand an across-the-board tax hike at this time.

Some bears had argued that the expiration of tax credits like Making Work Pay and the gradual winding down of the 2009 stimulus package would be a headwind for the economy in 2011, even if tax cuts were extended. The payroll tax holiday is a major and unexpected piece of stimulus that will help to offset those effects; I suspect most economists increase their estimates of 2011 gross domestic product.