The Obfuscation Report

January 12th, 2009 3:02 am
Fiscal Therapy

Getting the economy back on its feet, giving taxpayers a break, saving your retirement fund and your kid's college tuition? Done. And it won't cost you a penny

By David Cay Johnston / Mother Jones

For years now, whenever I've been invited to lecture students on how our tax system works, I have asked a simple question: What is the purpose of the United States of America? The most common answer, be it at prestigious universities, elite prep schools, rural community colleges, or crowded urban high schools, is this: To make people rich.

This should come as no great surprise. For anyone born after, say, 1970, the world has been shaped by Ronald Reagan's remaking of government's relationship with private interests—a vision of lower taxes, less regulation, and maximum economic leeway for those at the top. In this view, the pursuit of wealth is the warp and weft of America; everything else will follow.

By contrast, the preamble to the Constitution tells us the nation's reason for being in 52 words that can be reduced to six principles: society, justice, peace, security, commonwealth, and freedom. Individual riches don't make the list. They are a product of American society, not its guiding purpose. Progress, then, must begin with a return to the best of the values that created this Second American Republic—one born, it's worth remembering, from the failure of the Articles of Confederation, whose principles (weak government, unfettered capitalism) found their resurrection in the economic policies of the past three decades.

Even judged by its own yardstick, the trickle-down approach has failed to deliver: Rather than getting richer, we have been slowly impoverishing ourselves. While incomes at the very top have soared to levels beyond imagining even a generation ago, the average inflation-adjusted income of the bottom 90 percent of earners was lower in 2006 than it was back in 1973. And since 2000, the median income of all Americans has actually slipped, proof that tax cuts for the rich do not create general prosperity. Today, more and more of us do not have enough money to live on without going into debt. For each dollar of equity people gained in their homes from 1980 to 2006, they borrowed two—and while a portion of that is accounted for by poor decision making, much has to do with the sheer impossibility of making ends meet.

Debt payments—individual and governmental—now consume so much income that they are suffocating economic growth. Interest on the federal government's debt this year will eat up the equivalent of all the income taxes we pay from January until at least sometime in May. (Already, the financial system bailout has added more than $3 trillion to the national debt—see "$3.4 Trillion & Counting"—for an extra $170 billion in annual interest payments.) This keeps us from making productive use of our tax dollars—launching universal health care, rebuilding our crumbling infrastructure, or funding the research we need to transform our energy system. We've been sold on tax cuts as the best way to spur growth, but what we really got was weak job growth, a sinking economy, and a slew of tax deferrals that cause increasing revenue shortfalls and force the government to borrow even more—with all of us paying the interest.

For the past 14 years, on my former beat as the tax reporter for the New York Times, and now as a columnist for the trade journal Tax Notes, I have been documenting the myriad ways in which our economy has been recalibrated to take from the poor, the middle class, and even the affluent and give to large corporations and the very richest of the rich. I discovered, for example, that in 2000, people making between $50,000 and $75,000 paid the same share of their income to the federal government as those making more than $87 million, and that those making between $100,000 and $200,000 were taxed more heavily than those making $10 million—a state of affairs the Bush administration called "progressive" when I first reported it in 2005. Thanks to Reaganite economic policies, we have encouraged once-competitive industries such as oil, car manufacturing, accounting, and news media to congeal into unchecked (and now struggling) oligopolies. We have slashed the ranks of white-collar cops—the auditors and investigators whose beats are taxes, securities, food and drugs, pollution, etc.—and hamstrung those who are left. And we have transformed the idea that bankers would self-regulate from a crackpot notion into the essence of government policy, with results as predictable as if we removed all traffic lights and stop signs on the theory that most drivers are responsible.

Over and over for the past decade, our leaders argued that the fundamentals holding up our economy were strong. Now we know that this floor of shiny statistics merely concealed the rot below. But there is an upside to this realization: The economic crisis can help us clear away the rot and build a more solid foundation—one that elevates people over capital, kick-starts commerce, and removes some of the costliest barriers to individual success and national progress.

Change will not be easy, and the cost of cleaning up the current mess will be a huge drag on the economy in the near term. But we are, at last, at a turning point; we have a chance to end the socialism for the rich that put us into this hole. How? By, in effect, reverse engineering the debacle. Rewriting tax laws and financial regulations has been the principal vehicle for turning government into a subsidy system for the deep-pocketed and well motivated. It can work in reverse as well. President-elect Obama has offered some interesting ideas to make the tax code more fair—but by and large, his proposals amount to tinkering around the edges, not the kind of serious restructuring previous presidents, most notably Reagan, undertook.

Here's another way to go. We can start by eliminating some of the most spectacular tax giveaways and move on to doable, efficient steps toward shoring up our biggest asset—not stocks, bonds, or houses, but people. Best of all, much of this won't cost a penny; in fact, it will raise billions for the big tasks ahead.

Stop the Giveaways

Quit Cooking the Books

By law, companies must keep two sets of books, one for shareholders, the other for the irs. As a result, many corporations routinely tell investors they incur millions in corporate income taxes, while the financial records they give the irs show they owe nothing or are due refunds. They do this by using tax shelters, offsetting income with losses from years ago, and employing countless other devices that make them look like paupers to the irs but money machines to investors.

It's time to require companies to use the same accounting rules across the board—and then demand immediate payment of unpaid taxes. This would align the interests of investors with those of taxpayers while eliminating the obvious moral hazard of keeping two sets of books.

Executives are sure to complain that such a retroactive change is unfair. But recall that in 2006, when Congress voted to raise taxes on the interest from teenagers' college funds, Sen. Charles Grassley (R-Iowa) said it is proper to end abusive practices retroactively. Perhaps now's the time to prove it; the treasury could use a few hundred billion dollars.

Make the Superrich Pay Their Share

Back in 1990, people making more than $1 million in today's dollars earned less than 0.8 percent of all the wages paid in America. Last year these multimillionaires sucked up more than 5 percent, squeezing everyone else. Also during this period, the number of people getting million-dollar-plus salaries grew 12 times faster than the number of workers overall, tax data show—this in an economy where, in 2007, one in three workers earned less than $15,000, more than three-fourths made less than $50,000, and 99 percent earned less than $200,000.

We may never get back to the pre-Reagan tax rate for the top earners (70 percent), but we should at least nudge it back to the Clinton-era rate of 39.6 percent, as Obama has proposed, and for simplicity's sake round to 40 percent. To motivate executives, publicly traded companies could still be allowed to give out unlimited stock bonuses, provided that the execs pay taxes on the shares, cannot sell them for three years after leaving a company, and then must spread sales over at least five years. This would create a powerful incentive to manage companies for long-term success, which is good for jobs—and a smart ceo could still get fabulously rich.

End Legal Tax Cheating

The marginal tax rate for cops and teachers is more than 40 percent—25 percent for income taxes and another 15 percent for Social Security and Medicare taxes. The marginal rate for some hedge fund managers, five of whom earned more than $1 billion in 2007, has been zero. That's because many of these speculators have been able to avoid taxes by operating through offshore partnerships under rules that let them defer income taxes. Executives, entertainers, and athletes also have been able to amass vast untaxed fortunes: For example, Roberto C. Goizueta, the ceo of Coca-Cola in the '80s and '90s, built a nest egg of more than $1 billion, but was able to defer taxes on most of it until he died.

Tax deferrals are one of the major tools for redistributing wealth upward. While most of us must pay each time we get a paycheck, executives and corporations can defer their taxes for years, even decades. When the treasury finally gets the money, inflation has eroded its value; in the meantime, government must borrow more, pay more interest, and collect more from everyone else.

A provision in the Wall Street bailout bill addressed the hedge fund part of the problem, but a more comprehensive fix would involve stopping all deferrals beyond the modest amounts allowed for retirement savings (up to $16,500 a year for young workers, a little more for those over 50). Executives could still defer taking some of their compensation—a way of loaning money to their companies—but only after they pay taxes. Everyone would play by the same rules, and the federal government could gain $100 billion or more each year—enough to fund Obama's health care plan twice over.

Invade the Caymans

In 1983 just 10 percent of America's corporate profits were funneled through places that charge little or no corporate income tax; today more than 25 percent of profits go through tax havens. The Obama administration could tell the Caymans—now fifth in the world in bank deposits—to repeal its bank secrecy laws or be invaded; since the island nation's total armed forces consists of about 300 police officers, it shouldn't be hard for technicians and auditors, accompanied by a few Marines, to fly in and seize all the records. Bermuda, which relies on the Royal Navy for its military, could be next, and so on. Long before we get to Switzerland and Luxembourg, their governments should have gotten the message.

Barring gunboat diplomacy (tempting as it is), there is no reason we cannot pass laws to block financial transactions with tax havens or even, Cuba-style, make it a crime for Americans to visit or do business with them without special permission. Congress could declare the hiding of funds a threat to national security and require that anyone with offshore assets disclose them to the irs within 30 days and pay taxes, interest, and penalties within 180 days. For the holdouts, temporary special teams in the irs and Justice Department could speedily pursue civil or criminal charges.

Wean Wal-Mart (and the Yankees)

Did you know that the sales taxes you pay at most Wal-Marts go not to your state or local government, but instead pay back the cost of building the store? Sales-tax givebacks, as well as exemptions from property taxes, can amount to an extra 9 percent profit for retailers that extract concessions from local governments. That means not only a huge advantage for new arrivals over established, often locally owned, businesses, but also a direct hit to resources for local police, schools, and parks. The chain stores claim they are creating jobs. But basic economic logic says retail can add net jobs only when a population grows or incomes rise, and when those things are happening, market forces should be enough to spur new stores.

In a similar vein, the big four commercial sports make operating profits of $1.6 billion, Forbes has calculated—but their taxpayer subsidies exceed $2 billion a year (and that's before the estimated $864 million Mayor Bloomberg and Uncle Sam just handed to the New York Yankees), according to Neil deMause, coauthor of a book on sports subsidies. In other words, taxpayers literally provide all the profits of mlb, the nfl, nba, and nhl combined.

So it is that developer Theodore Lerner and his partners purchased the Washington Nationals baseball team in 2006 for $450 million, but stand to collect more than $1 billion in subsidies over the next two decades. In effect, the public bought them the team and gave them a $600 million tip. Using the tax code to eliminate any value in stadium subsidies would take care of this problem quickly and efficiently.

Cut Off the Utility Scam

Because they are regulated monopolies, our electric, natural gas, and water utilities must collect every part of their operating costs—including their income taxes—in the price they charge customers. Except that sometimes you pay for checks they never write: Oregon's Portland General Electric collected nearly $900 million from 1997 to 2006 for federal and state taxes, but actually paid less than $1 million. Xcel Energy, which runs electric utilities in eight states, collected at least $723 million for taxes it will never pay.

When utilities charge you for taxes they don't turn over to the government, customers pony up twice: once to pad the companies' pockets, the second time in higher taxes or government borrowing to make up for the shortfalls. Some states, such as Oregon, have moved to require that utilities hand over the taxes they collect, a push that companies (including Warren Buffett's PacifiCorp electric utilities) have been fighting hard. The federal tax code could easily be adjusted to make sure taxes embedded in utility rates are either paid or refunded to ratepayers.

Ground the Private Jet Exemption

Since 1985, executives have been able to take nearly free personal trips on company jets; all they pay is income tax on the value of the travel. Under federal rules, this travel is valued so low that flying a Boeing 737 equipped with a shower and master bedroom from New York to Paris costs an exec less than $500 as long as the company claims it is unsafe for him to fly commercial. (Try getting a middle seat in coach for that.) On top of that, companies get to deduct the full cost from their taxes. So if that Paris flight costs $100,000, government loses out on about $35,000 in taxes, and shareholders shoulder the remaining $65,000 in the form of reduced profits.

Congress should make executives using corporate aircraft for personal trips pay taxes on the actual cost of the travel. (And while they're at it, lawmakers should also look at rules that give corporate jets an unfair break on air-traffic-control fees.) This will not only improve the bottom line for companies by removing a subsidy for their top employees, but help commercial airlines bring in more high-fare customers. As a side benefit, it will trim some of the corporate flights that clog an already congested air-traffic-control system—saving the rest of us some time sitting on the tarmac.

Demolish the Mansion Deduction

Much as middle-class homeowners cherish it, the mortgage deduction functions mostly as another upside-down subsidy: Less than half of homeowners can use it, and for each dollar saved by those making between $30,000 and $40,000, those making $1 million or more save $380. (Canada, by the way, does not allow mortgage interest to be deducted at all, yet its home ownership rate matches ours.) If the goal is to help people get into their own four walls, a tax credit for principal paid by home buyers in the first few years of ownership would do far more. For a home worth $100,000, for example, such a credit could reduce income taxes by $2,000 a year for the first two years and $1,000 annually for the next three, saving the buyer $7,000.

Begin the Healing

Defang the Loan Sharks

For hundreds of years, enlightened governments have regulated interest rates to rein in loan sharks. Now Diff'rent Strokes' Gary Coleman pitches loans at 99.25 percent interest. Some "tax anticipation" loans cost the equivalent of 700 percent annual interest.

How did this happen? Back in 1978 the Supreme Court, confronted with a discrepancy between federal and state laws, threw out federal interest regulations and called on Congress to pass new ones. Instead, lawmakers milked the ruling for hundreds of millions of dollars in campaign contributions from credit companies eager to charge any rate they wanted. Thanks to interest deregulation, blue chip investment houses like Lehman Brothers got into the business of subprime mortgages while Goldman Sachs, JPMorgan Chase, Bank of America, and Wells Fargo bought or financed payday lenders that prey on the poor. In the three decades since interest-rate deregulation, credit card and other revolving debt has risen from $128 billion to $968 billion (adjusted for inflation), a 7.5-fold increase. Interest on this debt, at an average rate of about 18 percent, acts like a tax, leaving people with less to spend on the necessities of life.

But the industry wasn't satisfied with this credit boom, and so, in 2005, it prevailed on Congress (with a special assist from then-Senator Joe Biden) to pass a bankruptcy law making it much harder to restructure debt, no matter how predatory, even in case of job loss or illness. And in a little-publicized move, the Bush administration, over the protests of all 50 state attorneys general, also invoked an obscure clause in the 126-year-old National Bank Act to effectively invalidate state predatory lending laws. Repealing these anti-consumer provisions would cost the government nothing, but provide a real benefit for the economy in curbing banks' irresponsible practices, just as consumers are expected to do with theirs.

Save Our Savings

Compared with any other developed economy, Americans save far too little. In 2006, 55 percent of tax returns showed zero interest income from savings accounts. If we were to eliminate taxes on the first $500 of interest earned, people could set aside almost $17,000 with tax-free interest (assuming 3 percent interest) to cushion the shock of a layoff, accident, or illness. Congress could even match savings for low-income people dollar for dollar up to $500 per year, with the government share locked up for 10 years.

Protect Pensions

A pension is simply wages deferred to old age, which is why federal law requires that corporate pension plans be run "exclusively" for the benefit of the members. But in the past two decades Congress has turned that promise into a cruel joke; thanks to a little-known provision inserted by lobbyists in 2006, for example, workers could conceivably lose up to 85 percent of their pension when a new buyer takes over a company, as my one-time coworkers at the Philadelphia Inquirer recently discovered.

The core problem is that Congress lets companies postpone setting aside pension funds year after year. It also allows them to record as investment gains what they expect to earn in the market—even when they make less or actually lose money. Three years ago these phantom pension gains at General Motors accounted for the carmaker's entire net worth, a telling example of how accounting rules can create economic mirages.

Employee stock ownership plans, devised as a way to help workers build wealth, have also been turned into credit lines for speculators. Government rules allowed buyers of companies to use esop money as part of their financing, putting workers' shares at risk. United Airlines employees lost most of their shares' value in the company's 2002 bankruptcy—while ceo Glenn Tilton got a $40 million compensation package. Employees of the media conglomerate Tribune Co. may see their esop go bust, too, but ceo Sam Zell's stake is not at risk—because he made sure his equity is guaranteed even if Tribune collapses. Congress should restore protections so that workers get 100 percent of what they were promised, even if taxpayers have to make up the shortfall. It could also hold hearings to shame executives who got rich by shortchanging retirement plans, and make it easier to seize the bonuses of those who looted pensions.

End the Burglar-Alarm Subsidy

Each time police respond to a burglar alarm, it costs taxpayers $50 or more, for a total of $1.8 billion in 2002. More than $800 million of this hidden subsidy goes to adt Security, a subsidiary of Tyco, which was at the center of the Wall Street scandals eight years ago; in the '90s, Tyco started buying so many mom-and-pop alarm companies that it now controls nearly half of the market. Government data show that at least 94 percent of alarms are false, and a 2000 study in Seattle found that officers responding to alarms make one-ninth as many arrests as those just driving around in patrol cars.

In Los Angeles and elsewhere, the rise of gangs in the 1980s tracked a sharp decline in funding for parks and programs for young people. Ending the burglar-alarm subsidy and shifting the spending to youth programs would reduce crime (saving even more money) and help more kids grow up to become taxpayers instead of tax eaters. Washington could threaten to cut federal funding for any city that fails to charge the alarm companies the full cost of each response, thus encouraging companies to build more reliable systems.

Stop Indenturing Students

Over the past 40 years, the cost of public colleges has doubled, and financing tuition is an $85 billion a year business for credit companies. Sallie Mae, the biggest of the private student loan companies, earns an average 48 percent annual return, three times the return of commercial banks. Students who sign up for loans with what appear to be low fixed rates may discover upon graduating that they face an 18 percent rate; if they make a single late payment, late fees will be tacked on every month until the debt is paid off. And the law makes no allowance for students who can't find a job in a bad economy, or can't work because of illness, or choose to serve their communities by, say, joining Teach for America. Albert Lord, Sallie Mae's chief executive, has become so rich from student lending that he built his own private golf course just outside the nation's capital.

Profiteering off students is not just an obscenity; it ultimately weakens the economy. The abuses at Sallie Mae and other student lenders deserve exposure via congressional hearings. Then perhaps lawmakers will find the spine to make the rules fairer. Indenturing the brightest young minds in an information society is the equivalent of eating your seed corn in an agrarian one. In the long run, you're doomed.

Drag the IRS Into the 21st Century

When the 16th Amendment establishing the federal income tax was being debated, advocates argued it would return some portion of "surplus incomes" to the commonwealth. The goal was to make those enriched by the new phenomenon of industrialization pay back the society that made their fortunes possible. Consequently the middle class paid very little; incomes of $3,000 (the equivalent of $66,000 today) were exempt from income tax, and in the lowest tax bracket you paid just 1 percent. Today a single person is taxed at 10 percent once she makes more than $8,950 (twice that for married couples). Social Security taxes start with the first dollar of wages and end at just more than $100,000.

Given the vast sums they have transferred to the superrich in the past 30 years, the 88 percent of taxpayers who make less than $100,000 a year deserve a break. Congress should lower their taxes with an eye toward restoring their capacity to save (thus, as a side benefit, generating fresh capital for investment), while at the same time studying how to create a high-wage economy that can generate more revenue.

At a deeper level, it's time for a national debate about how we can go from our existing federal tax system, which was well designed for the 20th century but now throws sand into the economy's gears, toward an efficient, effective system for sustaining a 21st-century democracy. Congress should begin by holding hearings and giving Treasury a budget for research into alternative revenue sources such as a value-added tax and taxes on greenhouse emissions.

Our nation was founded on the idea that we would shape our own destiny. Structuring our taxes is a critical part of how we do that; and no matter what Sarah Palin told us during the campaign, paying taxes that are fair and just is the duty of a patriot. Time and hard evidence revealed that Reaganism was a disastrous mistake. Now we must get through the terrible night and on to a real morning in America.

Behind the lines with the Taliban By Paul Watson

January 11, 2009

Reporting from Ghazni, Afghanistan — The main highway is "enemy territory" for the Taliban, a busy two-lane road where U.S. troops race down the middle, trying to steer clear of suicide bombers. The guerrillas drive it like they own it.

Grinning with contempt at a convoy of Polish troops trying to plow its way through traffic the other day, three Taliban fighters with guns and long knives concealed under their heavy woolen cloaks calmly eased into the other lane and beat the jam.

When they reached the edge of this provincial capital just an hour and a half south of Kabul, the driver pulled onto a dirt track into the desert, coaxing the creaking old van over a speed bump and past a nervous-looking Afghan army sentry. The fighters flashed him a dirty look.

Just 30 yards from the American-built highway, we were entering Taliban country.

The speed bump presumably makes it easier for soldiers or police to stop vehicles and search them for guerrillas or weapons. But government troops usually stand back and look the other way as Taliban fighters move in and out of their vast desert stronghold.

"Police and soldiers can never come to our territory," said one of the fighters, a 28-year-old who identified himself only as Ahmadi. "If they do, they won't go back safe and sound."

Seven years after a U.S.-led invasion routed the Taliban regime, hard-line Islamic fighters who had scattered under massive bombardment to their villages and rear bases in Pakistan once again govern large swaths of Afghanistan. Although they are strongest in the south and east, they have launched attacks in all regions of the country -- and are well dug in across regions that surround Kabul, the capital.

The U.S. military says it may need up to 30,000 more troops in Afghanistan by summer, almost doubling the number of American forces there. Commanders say that the number of U.S. deaths, which rose by more than a third last year to 155, according to icasualties.org, is likely to rise.

Despite their increasing strength and confidence, Taliban fighters rarely welcome foreign journalists. The guerrillas are hyper-alert to potential spies.

And, among the Pashtun who dominate the Taliban, an ancient code of honor called pashtunwali demands that a host protect the life of a guest as if it were more important than his own. That's a tall order when the visitor is a foreigner traveling through countryside rife with kidnappers and competing militant factions during an escalating war.

Some Taliban commanders considered The Times' request for safe passage into their territory, only to reject a visit as too risky. But the Ghazni Talibs, eager to show the extent of their control, finally agreed.

With a bunch of plastic grapes and a Koranic verse as rearview mirror ornaments, the guerrillas' vehicle blended in with hundreds of minibus taxis that shuttle passengers through the Afghan countryside.

The Talibs, whose thick, black beards and large turbans are as much emblems of a proud Pashtun heritage as symbols of allegiance to the militant mullahs, said they make regular trips to and from Ghazni city, and up the highway to Kabul.

In Ghazni province, at least, the Taliban militants are not frightened fighters skulking in caves, sneaking out to ambush and then scurrying off to another mountain hide-out. They live comfortably in the farming villages where many of them were born, holding territory, recruiting and training new troops, reveling in what they see as God's gift of inevitable victory against heathen foreign occupiers.

"In the early days, there were many spies, so we had to move around in small groups," Ahmadi said. "But now we are in groups of 300 or 400. We have no problems."

During their downtime, they watch satellite TV and stay current with each day's news. Lately, they've seen a lot of bombing and corpses on Al Jazeera television coverage of the Israeli offensive against Hamas in the Gaza Strip. The Ghazni guerrillas said the images made them more determined than ever to fight, and if necessary die, to expel U.S. troops and their allies, whom they consider Crusaders bent on destroying Islam.

"We are ready to give our blood for the freedom of our homeland, and also to end the oppression by the Americans," said Ahmadi, who masked his face with a black-and-white kaffiyeh, more commonly worn by Palestinian Arabs than his fellow Afghans.

"The Americans support Israel, and when they come all the way here, we must at least be ready to defend our land. Death in youth would be a matter of pride for us."

Satellite TV has also kept the Talibs up to date on preparations for the inauguration of President-elect Barack Obama, whom one dismissed as "just another infidel," and the impending U.S. troop buildup.

The Talibs say any increase would only give them more opportunities to kill non-Muslims in jihad, or holy war, just as U.S.-backed mujahedin did in almost a decade of war to drive Soviet forces from Afghanistan in the 1980s.

"The Russian army had hundreds of thousands of troops here and lost. Now it's the Americans," said a second Talib, who refused to identify himself. "If they increase their force to 100,000 or 200,000, we'll never lose our morale. We will continue our jihad. The more soldiers they send, the happier we become."

Some accuse the Taliban of press-ganging villagers into the fight. But the Ghazni Talibs claim that eager volunteers swell their ranks by 10% a month, and insist that they turn many away.

"There is no need for all of them," Ahmadi said, and the second Talib added with a confident smile: "There isn't so much logistic support available either."

Despite efforts by the U.S.-led military coalition to disrupt Taliban commanders' ability to direct military operations from a distance, the guerrillas appeared to be in regular contact with their leaders, and acted on their orders.

After a back road rendezvous, the Talibs' van headed for the two-lane highway that links Afghanistan's two biggest cities, Kabul and Kandahar. Our driver paused a minute to let a convoy of Polish troops pass in Humvees.

Soldiers swiveling in turrets scanned us through their gun sights, but the troops kept moving slowly northeast to the relative safety of the city. We headed in the opposite direction, toward Qarabagh district, notorious for kidnappers.

Militants often ignore the steady traffic of military helicopters clattering overhead, or patrolling ground troops, and brazenly set up daytime checkpoints to search for foreigners, aid workers and government employees.

In July 2007, militants abducted 23 South Korean Christian aid workers along the highway as the bus they were on passed through a district bazaar. Two men were killed; the others were later released.

By a roundabout route, trundling through the stubble of harvested fields and across streams fed by snowmelt from mountains on the horizon, we reached a village within clear sight of a small white observation blimp floating on a tether above a Polish base.

A pair of Talibs, their faces obscured by head scarves, met the van with fingers on the triggers of their Kalashnikov assault rifles. After a quick frisk and a handshake, they escorted us by motorcycle to a large compound with towering mud-brick walls.

The building hardly had the feel of a besieged guerrilla hide-out. The small reception room had new white curtains, clean cushions for guests to recline on and a well-kept wool rug. A few framed photos of family elders decorated the white-painted walls.

In keeping with the Pashtun custom of generous hospitality, the guerrillas served glasses of steaming hot sweet tea and a bowl of white candied almonds. In no hurry to end the conversation, they laid out bowls of chicken broth, yogurt, a shaker of salt and freshly baked flatbread for lunch.

As the discussion progressed, and the Talibs relaxed, most unwound the cloths covering their faces. One reached into a camouflaged vest bulging with a bayonet and banana clips of ammunition for his AK-47 and pulled out a small round tin to enjoy a pinch of chewing tobacco.

Any indulgence that harms the body is haram, or forbidden, to strictly observant Muslims. But in Taliban-held villages, the guerrillas' taste for chew wasn't the only hint that the mullahs may be taking a softer line on at least some of their old edicts, though they continue to execute people deemed un-Islamic enemies, such as teachers and other government workers.

The Talibs' van carried a selection of music cassettes for their tape deck. When the Taliban ran most of the country, cassettes were seized at checkpoints, and countless strands of shiny brown tape were strung up on poles to blow in the wind like raffia dolls.

Taliban enforcers used to grab men's beards, and anything less than a fistful of facial hair warranted a severe beating on the spot. But several men walking the roads in Taliban territory were cleanshaven. Even one who attended the meeting was without a whisker. The others called the bashful, baby-faced Talib "The Doctor."

The Talibs admitted burning government schools, but argued that doesn't mean they are against education, as long as it conforms to their idea of proper Islamic schooling.

"Now the government is doing voter registration in schools, and we are against elections as long as foreigners are in the country," said the second Talib. "They are using schools as trenches against us. So when schools get burned, it is their fault."

The Taliban's courts mete out justice under Islamic Sharia law. It is harsh, yet popular with many Afghans tired of seeing justice go to the highest bidder in government courtrooms, and angry that Western donors have pressured President Hamid Karzai to stay the executions of most convicted criminals on death row.

Some of the Ghazni Talibs said they had participated in the early effort to support the elected government of Karzai, a fellow Pashtun, only to become disillusioned and take up arms against it.

One Talib showed a voter registration card with his photo on it. Another said he used to work as a laborer for the American military in Ghazni on a Provincial Reconstruction Team.

The Talibs' interpreter was a village teenager home on vacation from high school in Kabul. The boy said he wants to be a doctor, and was eager to find out about scholarship opportunities in the West, but he also boasted about his readiness to fight foreigners.

The Taliban is also benefiting from foreign reinforcements, and the guerrillas' ranks include Americans, Europeans, Arabs, Chinese and other fighters, said Maulavi Arsalan Rahmani, who was minister of higher education in the ousted Taliban government.

Now senator in the Afghan parliament, Rahmani said senior Taliban leaders who answered Karzai's call for reconciliation, and moved to Kabul and other government-controlled cities, feel betrayed by the promise of rapprochement. Anger is simmering among almost 60 high-ranking Taliban defectors because the U.N. Security Council refuses to lift sanctions against them.

They include the Taliban's former foreign minister, Wakil Ahmed Mutawakel, its commerce minister, Abdul Razaq, and Qazi Habibullah, who served as ambassador to the Taliban's closest allies, Pakistan and Saudi Arabia.

That discourages other Talibs from dropping their weapons, Rahmani said.

"They don't trust the promises," he added. "They openly keep saying, 'What good have those who have gone to the other side done? They are not given the rights of an Afghan.' "

Still, members of the Taliban are ready for peace and have proposed a three-stage plan to Saudi Arabia's King Abdullah and other leaders, Rahmani said, that would culminate in talks about what role the Taliban should play in the government.

Rahmani, who vowed to leave the country if the Taliban ever controlled it again, said the Taliban should only share power, and not run a government itself, because few of its leaders are qualified.

"We have indirect relations with the Taliban. They will accept our proposals and the government will too," he insisted. "But what we are not certain about is whether the international community really wants the war to end. We doubt it, we doubt it."

Emerging again from the desert, the Ghazni Talibs showed no fear of being tracked from their village base as the van kicked up a long, high tail of dust. They casually parked at the side of the highway, waiting for their guest's pickup car to make its way through an Afghan army checkpoint.

Their passenger safely transferred, the Talibs, waving and smiling into the city, headed off toward the waiting troops.

Wealthy Afghan elite sows bitterness

KABUL, Afghanistan - Across the street from the Evening in Paris wedding hall, a monument to opulence surrounded by neon-lighted fountains and a five-story replica of the Eiffel Tower, is a little colony of tents where 65 families, mostly returnees from Pakistan, huddle against the winter cold and wish they had never come home.

Similar startling contrasts abound across the Afghan capital. Children with pinched faces beg near the mansions of a tiny elite enriched by foreign aid and official corruption. Hundreds of tattered men gather at dawn outside a glittering new office building to compete for 50-cent jobs hauling construction debris.

"I am a farmer with 11 children. Our crops dried up, so I came to the city to find work, but all day I stand here in the cold and no one hires me," said Abdul Ghani, 47. "All the jobs and money go to those who have relatives in power, and corruption is everywhere. How else could they build these big houses? Nobody cares about the poor," he added bitterly. "They just make fun of us."

Seven years after the fall of the Taliban and the establishment of a civilian-led, internationally backed government, Afghanistan remains one of the poorest countries in the world, with rates of unemployment, illiteracy, infant mortality and malnutrition on a par with the most impoverished nations in sub-Saharan Africa. Most homes lack light, heat and running water; most babies are born at home and without medical help.

Now, according to U.N. figures, the populace is getting even poorer. A combination of drought, soaring food prices, scarce jobs and meager wages has meant that about 5 million Afghans -- far more than in any recent year -- are slated to receive emergency food aid. Many families spend up to 80 percent of their income on food.

Ill-gotten wealth?
Yet against this grim backdrop, pockets of wealth have mysteriously sprung up in Kabul and other cities. Officials who earn modest salaries on paper have built fantasy mansions, and former militia commanders with no visible means of support roar around the muddy streets in convoys of sport-utility vehicles, spattering the burqa-covered widows who squat at intersections with their hands held out.

It is difficult to prove, but universally believed here, that much of this new wealth is ill-gotten. There are endless tales of official corruption, illegal drug trafficking, cargo smuggling and personal pocketing of international aid funds that have created boom industries in construction, luxury imports, security and high-tech communications.

"The entire economy has become criminalized," said Ashraf Ghani, a former World Bank official who quit his post as Afghan finance minister several years ago and is expected to challenge President Hamid Karzai in elections this year. "There is a crisis of governance. Corruption is way up, and poverty is massive. People are disheartened and confused."

Much of the corruption takes the form of penny-ante bureaucratic palm-greasing, with clerks demanding small bribes to stamp forms or police officers at checkpoints requiring truck drivers to pay to enter cities. But some is more audacious, such as municipal authorities selling government land for luxury housing projects or security officials colluding with the drug traffickers they are supposed to be catching.

Afghanistan has always been poor. Its people are among the hardiest on the planet, and its warriors have been famed for fighting foreign armies in sandals and shawls. But it is the widening gulf between the haves and the have-nots -- between the VIPs in speeding SUVs and the garbage scavengers riding donkey carts -- that has increasingly embittered the public, turning it against the Karzai government and its foreign backers.

In dozens of interviews this month, Kabul residents complained that they were struggling to feed their families and heat their rooms on scanty or occasional wages, while access to sources of prosperity such as ministerial sinecures and jobs with international agencies was limited to the lucky few with relatives in high places or the means to pay bribes.

"People are really feeling the gap between rich and poor now," said Ebadullah Ebadi, a spokesman for the World Food Program here. "Once there were three classes in Afghanistan: the rich, the middle and the poor. Now those in the middle are joining the poor, and prices are rising so high that people can't feed their families on salaries that once allowed them to educate their children and even save a little money."

Karzai has publicly acknowledged that corruption plagues all levels of his government, yet critics say he is either unable or unwilling to stop it. The new Afghan constitution has numerous provisions requiring officials to disclose their assets and perform their duties with financial transparency and accountability, but they are rarely heeded, according to a recent study by the Free and Fair Elections Foundation of Afghanistan.

The public mood of frustration, desperation and disgust has played into the hands of Taliban insurgents, who present themselves as an alternative source of justice and carry out swift physical punishments of thieves or other miscreants in rural areas under their control. It was a similar appeal to law and order in the mid-1990s, when Afghanistan was in the throes of civil war, that allowed the Taliban militia to quickly achieve power with little bloodshed.

Most Afghans do not favor a return of the Taliban, especially in cities where their extreme version of Islam clashed with the lifestyles of the country's educated classes. But more and more, people recall the five years of Taliban rule as a time of brutal but honest government, when officials lived modestly and citizens were safe from criminals.

"Nobody loved the Taliban, but what we see now is outrageous. The leaders are not rebuilding Afghanistan, they are only lining their pockets," said Abdul Nabi, 40, a high school teacher. "I haven't been paid in three months. The other day, a colleague came to me weeping and asked to borrow money to buy bread. Who can we blame for this?" he demanded. "Where can we turn to change things?"

In the tent colony next to the Evening in Paris, Zakia, a mother of seven, recounted how her family had been forced to leave its refugee camp in Pakistan and return to Kabul last year. They had expected to obtain land and jobs but found neither, she said. Last week, a young woman in one tent died while giving birth. "If we had known what we would face here, we would never have come back," she said.

Across the street, sitting in his ornate office, the owner of the French-themed wedding hall expressed surprisingly similar sentiments. He complained that the government had done nothing to encourage private development, that he had to buy water and power privately and that the unpaved street outside his elegant premises was a sea of mud.

"Do I regret making this investment? I regret it 100 percent," said the owner, who gave his name as Hajji Obaidullah. "When I built this hall five years ago, there was a lot of hope and excitement, but now it has all turned to disappointment. We have no electricity, no drinking water, no security. If the government doesn't want to help people like me, how is the man with the little shop or the donkey cart going to survive?"