Republicans prevailed on their biggest demand: continuing Bush administration tax cuts for the wealthiest Americans, despite Obama's 2008 campaign promise to let them expire for households earning more than $250,000 a year. Obama, while acknowledging Democratic unrest, agreed to extend the tax breaks for two years, whereas Republicans wanted a permanent extension.
House and Senate Democratic leaders were noncommittal on the proposal, saying they would discuss it in closed caucus meetings Tuesday. Vice President Joe Biden, a key player in seeking a compromise, scheduled a rare visit to the Senate Democrats' weekly luncheon the same day.
Obama explained Monday that the concession was the only way to prevent a congressional impasse that would cause the tax cuts enacted in 2001 and 2003 to expire for all taxpayers. With 9.8 percent of Americans unemployed, he said, that would be "a chilling prospect."
Liberal groups were furious at his willingness to bend, but Obama said he rejects "symbolic victories" that hurt average Americans.
His plan also would renew jobless benefits for the long-term unemployed, and grant a one-year reduction in Social Security taxes paid by workers but not by employers.
The president had barely stopped speaking before top Republicans applauded his proposals, while most Democrats kept a sullen silence.
Senate Minority Leader Mitch McConnell, R-Ky., thanked Obama for "working with Republicans on a bipartisan plan to prevent a tax hike on any American and in creating incentives for economic growth."
Because they hold solid majorities in both chambers, Democrats must provide many votes for the tax package to become law, even if Republicans overwhelmingly support it.
Some Democrats quickly denounced the plan. "Senate Republicans have successfully used the fragile economic security of our middle class and the hardship of millions of jobless Americans as bargaining chips to secure tax breaks for the very wealthiest among us," said Sen. Tom Harkin, D-Iowa.
The emerging agreement includes tax breaks for businesses that the president said would contribute to the economy's recovery from the worst recession in eight decades.
The proposed Social Security tax cut would apply to virtually every working American. For one year they would pay 4.2 percent of their income, instead of 6.2 percent, to the government retirement program, fattening U.S. paychecks by $120 billion in 2011.
Someone earning $40,000 a year would receive a $800 benefit, and a $70,000 earner would save $1,400, officials said. More than three-fourths of all Americans pay more in these so-called payroll taxes than in federal income taxes.
The White House said money from other sources would be shifted so the Social Security trust fund loses no revenue.
Obama said he reluctantly made another concession to Republicans, concerning the estate tax. It would tax estates worth more than $5 million at a rate of 35 percent, a GOP goal. Democrats favored a $3.5 million threshold, with a 45 percent tax on anything higher.
Obama's willingness to compromise with Republicans comes a month after the GOP won resounding victories in congressional, gubernatorial and state legislative elections. They will control the House in the new Congress that convenes next month. In the Senate, they will easily be able to filibuster any provisions they oppose.
Addressing his liberal critics Monday, Obama said, "Sympathetic as I am to those who prefer a fight over compromise, as much as the political wisdom may dictate fighting over solving problems, it would be the wrong thing to do."
"I'm not willing to let working families across this country become collateral damage for political warfare here in Washington," he said.
Under his plan, unemployment benefits would remain in effect through the end of next year for workers who have been laid off for more than 26 weeks and less than 99 weeks. Without an extension, 2 million individuals would have lost their benefits over the holidays, the White House said, and 7 million would have done so by the end of next year.
Obama's proposal also would extend a variety of other tax breaks for lower and middle-income families, including the Earned Income Tax Credit and the child tax credit.