Taxes and why everybody loves Hank.

Washington insiders say one reason new Treasury Secretary Hank Paulson's popularity is soaring, both internationally and on Capitol Hill, comes down to one word--taxes. It is commonly known that Paulson and George W. Bush are in disagreement over the issue of tax increases. Paulson theoretically believes tax increases at the highest bracket may be necessary as a bargaining chip to achieve a bipartisan grand compromise on deficit reduction on Capitol Hill. By contrast, Bush believes in the Karl Rove theory that tax cuts (or at least the promise not to raise taxes) is the one issue both separating Republicans from Democrats and cementing the Bush White House to its conservative base.

Few Washington observers believe the President will relinquish his promise not to raise taxes, and tax hikes clearly are not on the Treasury Secretary's agenda. The intrigue stems from the fact that Paulson is one of 2008 Republican presidential frontrunner John McCain's closest informal advisors on economic policy. Another top advisor: investment banker Pete Peterson. Both would hardly fight the formation at some point over the next several years of a grand compromise to solve the U.S. deficit problem. Countering this advice is likely to be former Senator Phil Gramm (R-TX), another McCain adviser.

Notice that as a subset to this argument, most Washington politicians are fixated on the need for Congress to "fix" the alternative minimum tax problem within the tax code. The likely proposed course of action: raise taxes on the upper brackets to produce enough revenue to eliminate the alternative minimum tax increases now hitting upper middle class taxpayers, most of them in the Northeast. The upshot is that the Karl Rove political theory on taxes could soon be tested.