It appears that the Dem's lost negotiating leverage by not dealing with this issue prior to the recent election. If they let the tax cuts expire now they would have to deal with a GOP House and a more balanced Senate in 2011. The GOP has taken advantage of the loss of negotiating power with the absence of the threat to let the taxes expire.
The deal will add $900 billion to the deficit over the next 2 years. Tax cuts for the wealthy will cost $120 billion, which the GOP insisted upon despite their "concern" for deficit reduction. Tax cuts that both parties wanted will cost $360 billion, and Obama got $450 billion in a back door stimulus that is expected to reduce unemployment by 1.5% by the 2012 election. Obama believes that this will give him a chance for reelection. The tax cuts will expire in 2012 and if Obama wins he has the opportunity to credibly threaten a veto of any continuation of the tax cuts.
The reaction to the compromise has been very negative in Obama's base. He will have to do a lot of fence mending between now and 2012 to get the support that he will need for reelection.
It really galls me to read the comments from the GOP Senate Minority Leader who claims that the Democrats compromise is a recognition of their weaker position after the election. He assumes that the GOP is now in charge even though the Dem's hold the presidency and still have a majority in the Senate. I recall that after the beating that the GOP took in the 2008 elections they dug in and strengthened their position. The Dem's better do the same thing.