Home Mortgage Interest: the most over-rated deduction

My annual April op-ed piece on taxes, appearing in newspapers across Indiana...

It’s that time of the year again. Some people filed their 1040 tax forms last January, received their refunds and are excited that they let the government keep their money (interest-free) for months. Others have procrastinated and are filing their taxes at the last minute. Few taxpayers have noticed their “payroll tax” (FICA) - even though it probably takes more of their money (unless they earned a six-figure income). And most people believe that the world is a better place because of the Home Mortgage Interest Deduction (HMID).

Economists are interested in the distortions caused by subsidies in the tax code. Subsidies change incentives, so that people end up doing more of the activity being subsidized - whether it’s attending college, purchasing health insurance through one’s employer, or buying a bigger house. Such policies may be ultimately desirable. But they are “socially inefficient” - by definition - because they take resources from a more productive part of the economy and encourage people to do what has become “personally efficient.”

The HMID is projected to cost $132 billion next year. Even in years without budget concerns, that’s a lot of money. Now, some will say that this subsidy is important for the housing sector in particular and the economy in general. They point to the “multiplier effect” of jobs created by the housing sector - from construction workers to input suppliers, from those who earn the money to those who benefit when that money is saved, given away and spent on consumer goods.

But the same could be said of other ways to use $132 billion. For example, we could put the same money into infrastructure and create jobs, while improving roads and bridges. So, why would we think that spending the money for the HMID is better than alternative uses of the same money?

Aside from efficiency, there are also important questions of “equity” or fairness. One who receives a subsidy is likely to see that subsidy as “fair.” But if we’re trying to be more objective, what can be said about the fairness of the HMID?

Beyond its overall cost, the subsidy provides a disproportionate benefit to the wealthy. Intuitively, this is relatively easy to understand. One has to itemize deductions to get it. From there, the gain is only the amount of the itemized deduction over the standard deduction. In 2010, the standard deduction for married couples was $11,400. So, unless your mortgage interest and other deductions (most notably, charitable contributions, state-local income taxes and property taxes) exceed that amount, your mortgage interest does not reduce your taxable income at all.

For example, if a married couple has mortgage interest of $5,000 and total deductions of $12,000, then they only get the extra $600 over the $11,400 standard deduction. From there, you multiply the $600 reduction in taxable income by the relevant marginal tax rate (MTR). If they’re in the 15 percent tax bracket, then the extra $600 in deductions would be worth $90 in lower taxes. It’s difficult to get excited about saving $90 in taxes by giving a bank $5,000.

Both the amount of itemized deductions and the MTR typically increase with income. So it follows that the wealthier should be expected to benefit a lot, while the policy does little for the middle class and nothing for the poor.

Let’s look at the numbers. Some states benefit more than others. In 2008, 27 percent of Americans claimed the HMID for an average deduction of $3,279. But use of the HMID ranged between individual states, from Maryland’s 38 percent to North Dakota’s 15 percent. And average HMID deductions ranged from California’s $5,520 to North Dakota’s $1,222. (In Indiana, 33 percent claimed the HMID with an average deduction of $3,337.)

A recent study by the Urban Institute focused on the net tax benefit of the subsidy. Among Whites, 26.4 percent benefit from the HMID, by an average of $632. Among African-Americans, only 14 percent benefit from the subsidy, by an average of $277. Looking at income levels, the average annual benefit of the HMID is $4,466 for the top 5 percent of income earners; $2,639 for the top 20 percent; $215 for the middle 20 percent; and $2 for the lowest 20 percent.

It’s difficult to imagine why one would be really excited about this policy - rather than lower, overall taxes or lowering the deficit - unless one is wealthy and has a mortgage on an expensive home. But we should expect our politicians to rise above such selfish interest and to enact policies that are more efficient and more equitable.

Lincoln on equality between whites and blacks

Lincoln in 1858 on the question of equality between the races (hat tip: Tom DiLorenzo):

"I will say then that I am not, nor ever have been in favor of bringing about in any way the social and political equality of the white and black races, that I am not nor ever have been in favor of making voters or jurors of negroes, nor of qualifying them to hold office, nor to intermarry with white people; and I will say in addition to this that there is a physical difference between the white and black races which I believe will forever forbid the two races living together on terms of social and political equality. And inasmuch as they cannot so live, while they do remain together there must be the position of superior and inferior, and I as much as any other man am in favor of having the superior position assigned to the white race."

Jenkins' The Lost History of Christianity

Jenkins is referring to the "lost history" of Christianity in Africa and Asia vs. Europe and America. The cover photo is a German artist's map of the 16th century's (primary) known world with three flower-petal-shaped land masses depicting Europe, Asia, and Africa-- AND with Jerusalem at the center of the world.

Jenkins notes that Christianity's history has featured both growth and decline. In contrast, the common wisdom is that Christianity was mostly European after the 5th century-- and has grown quite a bit since the 14th century, largely in Europe and America. The last part of this is correct, but not for the reasons or timing usually imagined: "Christianity became predominantly European not because this continent had any obvious affinity for that faith, but by default: Europe was the continent where it was not destroyed." (3)

As a result, Jenkins argues that "We can't understand Christian history without Asia-- or, indeed, Asian history without Christianity." He chronicles some of the many amazing successes of this Christianity-- in terms of evangelism, translating the Scriptures into native tongues, Biblical scholarship, and weighty spiritual experience and disciplines.

Perhaps this success shouldn't surprise us, since Jerusalem was closer to the "seemingly exotic territories of Central Asia than it is to France...If early Christians could reach Ireland, there was no logical reason why they should not find their way to Sri Lanka." (53)

Jenkins provides numbers as well. As late as the 11th century, Asia had about 1/3 (17-20 million) and Africa 1/10th (5 million) of all Christians (4). And at that point in history, the Asia/Africa wings of the Church were stronger and better established. He argues that they were still "the leaders" even at that late date.

Even in 1900, Christians were still 11% of the population in the Middle East-- quite a bit more than other notable, religious minorities today (American Jews' 2%; European Muslims' 4.5%). Christians comprised 15-20% of the population of Asia Minor-- and half of Constantinople's population in 1911 (141, 152-154).

That said, by the 20th century, in relative terms, non-European/American Christians had shrunk as a proportion of all Christians, given relatively low population in the Middle East vs. elsewhere. In the 20th century, the Christian population in the Middle East increased from 4.4 to 9 million, but given big population growth that century, was reduced from 10% to 3% of the overall population (168).

The Church became predominately European in the Middle Ages, starting in the 14th century. Part of this was its rise in Europe; part of this was its decline elsewhere. For example, Asian Christians fell from 21 million to 3.4 million between 1200 and 1500 (24). Overall, Asian Christian communities went from majority/dominant (or at least prominent), to minority status, and then eventually, many were eliminated. Why the decline? A combination of "positive" factors, mild negatives, and brutal negatives.

As Christianity declined, Jenkins argues that Christians and Muslims mostly got along. Christians certainly endured modest discrimination and persecution-- but not enough to cause big trouble and arguably, helpful for strengthening faith and building community. But at times, the pressures and violence increased dramatically, leading to conversion, migration or death. An interesting aspect of this was assumed foreign policy intrigues-- as Christians in Asia were assumed to be in cahoots or at least sympathetic to attacking Christians from Europe (157).

There were also a number of "positive" attractions to Islam. Jenkins points to a number of subtle cultural/political influences: Muslim buildings were more likely to be rebuilt after wars and plagues; Christian language was perceived as as old/archaic; they were surrounded by a Muslim landscape and architecture; the coins depicted Muslim leaders and themes; and the dominant Muslim culture "looked successful".

Surprisingly, another allurement was that Christianity and Islam looked much more similar early-on (31a). This resulted from and resulted in various forms of syncretism. In Islam's early days, there were considerable similarities in belief and practice; perceived overlap in the Scriptures (the Quran seems to have been inspired in part by the OT); and even, shared shrines and saints! Islam was often seen as a heresy of Christianity rather than its own religion (184-187, 194-195, 201-202, 202-205).

The Christians were also disunified-- as European Christians sought to lord it over their Eastern brethren. In fact, they often preferred Muslim to Catholic governance: "Better the Sultan's turban than the Cardinal's hat!" (150)!

Jenkins describes the decline as a "ratchet effect"-- similar to "punctuated equilibrium" in Evolution (211). Instead of gradual decline, there would be a steady-state with occasional, steep drops. Jenkins notes that the Christian populations became more vulnerable-- in terms of quantity and "quality"-- as they were increasingly fragmented. He also depicts some of the declines country-by-country-- e.g., Iraq dropping from 5-6% in 1970 to 1% now (169). Jenkins also gives considerable space to the Armenian Genocide (161-163)-- a little-known but staggering pre-cursor for what would follow-- for Christianity in particular and the world in general-- throughout the 20th century.

Jenkins notes that two factors improved the prospects for survival-- both of which explain the amazing story of the flourishing Copts in Egypt: geographical protection (236-240) and getting into the roots of the culture (35, 230-233).

Interestingly, Christianity is again moving toward the global South today-- with a meteoric rise in South America, China, and Africa in particular. Why is all of this important? For one thing, both the past and the future impact one's eschatology (the trajectory of human history and the nature/timing of God's interventions within history). The dominant evangelical eschatology is pre-millennial-- where things get worse and worse, and then Christ comes to wrap things up. But an understanding of the decline and growth of Christianity in the past-- and its worldwide growth now-- point to the possibilities (probabilities?) of a-millennialism (history goes back and forth between good and evil) and post-millennialism (where God's Kingdom expands more or less over world history).

The book is an easy/pleasant read. If you want to know more about Christian history, check it out!

Big 10 and Big 12 underperform Big East in NCAA tournament

For all of the notice given to the Big East's Big-Time failures in the first two rounds of the NCAA tournament, one can argue that the Big 12 and the Big 10 under-performed even the Big East.

The seedings tell us the committee's expectations of victory: a 9-16 seed should not win a game (except for half of the eight teams who played in the "First Four" games); #5-8 seeds should win one; #3-4 seeds should win two; #2's should win 3; and the #1's should have won at least four. (Of the latter, given the seedings of the #1 seeds, Duke and Pittsburgh should have won four games; Kansas—five; and Ohio State—six.)

With their seedings, here is the difference between expectations and performance in this year's tournament for every conference with more than one team in the tournament:

Expected vs. Actual Wins-Losses; Expected vs. Actual %

Big East: 17-11 vs. 13-10; 61% vs. 57%

Big 10: 11-6 vs. 7-7; 65% vs. 50%

Big 12: 9-5 vs. 5-5; 64% vs. 50%

SEC: 6-5 vs. 7-5; 55% vs. 58%

ACC: 8-4 vs. 8-4; 67% vs. 67%

Pac-10: 4-4 vs. 5-4; 50% vs. 56%

Mtn. West: 6-3 vs. 4-3; 67% vs. 57%

Atlantic 10: 2-3 vs. 3-3; 40% vs. 50%

Colonial: 1-3 vs. 6-3; 25% vs. 67%

Conf. USA: 0-2 vs. 0-2; 0% vs. 0%

Other: 3-21* vs. 9-21; 13% vs. 30%

* of teams in conferences with only one bid, only Butler and two of the 16 seeds (in the play-in game) were expected to win a game

The Big under-performers were the Big conferences:

Expected vs. Actual Wins-Losses; Expected vs. Actual %

“Power 6”: 55-35 vs. 45-35; 61% vs. 56%

All Others: 12-32 vs. 22-32; 27% vs. 41%

nuggets from Farris' "From Tyndale to Madison"

These are tidbits from my reading of Michael Farris' From Tyndale to Madison-- a great book on the historical emergence of religious freedom in the U.S. and Europe. (Here's the full review...)

First, Farris has a number of insights that relate to what constitutes "true" Christianity-- really, and merely in perception.

One big perspective difference: The view in that time period was so different from today. The aim today is the conversion of individual souls; then, it was trying to turn nations into a unified “true” church.

One tool used for this was persecution. A resulting irony for those who saw themselves as the “true church”: by persecuting true believers, the persecuted were strengthened spiritually, in a way only available through persecution. In contrast, those who saw themselves as the true church struggled to maintain their faith—both in their families and in efforts to evangelize.

Related to this, Farris also depicts a common contemporary phenomenon: the frequent transition from true believers (or those who pass as such through their religiosity) to cultural Christians from one generation to the next. Avid followers were unable to pass along their "faith" and it turns lukewarm in the next generation. This led to a big dilemma: For those in colonial America who were trying to define the State as Christian, how do you define "church member" and thus, "citizen"-- especially when so much is at stake, politically.

The same problems impacted attempts at "evangelism". Farris critiques early English settlements among the Indians as far more interested in turning them into English than disciples of Jesus (236-237): “It is impossible to say what might have happened if the English settlers had practiced a form of Christianity that honored the freedom of the will rather than the doctrines of coerced uniformity. Perhaps if the message had been to ‘become like Christ’ rather than ‘become British’, the outcome would have been different.” (243)

Second, a series of little things…

a.) Farris on King James: there was “considerable evidence that King James I had homosexual leanings and, in fact, did little to hide his affections—to the great disgust of some members of his court.” (125-126) What irony, given the support for the KJV of the Bible among fundamentalists!

b.) Farris argues that gambling (75-77) fueled disputes between the wealthier Calvinists (yes) and the poorer free willers (no) in jail!

c.) A few ironies for Baptists:

-the first “believer’s baptism” by an English-speaking congregation was not done by immersion…but pouring water over and drenching the head” (135)

-both men and women were deacons (139)

-the emphasis what on the individual believer, but there was a big focus on church discipline and accountability (298)

d.) Farris asks his readers to imagine American history if Virginia had not narrowly supported the Constitution. Without a “Bill of Rights”, Virginia would not have been on board and Washington could not have been President!

e.) Farris repeats a common confusion about “libertarian (sic) morality”. He means "libertine" morality and ironically, ends up criticizing what he wants, at least in this context: “libertarian politics” (90).

f.) Reading Farris makes clear that religious freedom is freakish in human history. This impacts eschatology. First, the last two centuries suddenly look a lot better. Second, Revelation 13's combo of State and False Religion becomes even more impressive. Revelation 13 may refer to some End-Times event, but it clearly applies to the End Times (defined as the Church Age).

g.) A great quote from Jefferson to close: “Millions of innocent men, women, and children, since the introduction of Christianity, have been burnt, tortured, fined, imprisoned; yet we have not advanced one inch toward uniformity. What has been the effect of coercion? To make one half the world fools, and the other half hypocrites.”

the emergence of religious freedom: my review of Michael Farris' "From Tyndale to Madison"

The shorter version of my review of Michael Farris' book, From Tyndale to Madison.

Some nuggets from the book-- in a separate post.

Here's the longer review, scheduled to come out with Indiana Policy Review this summer.

January 16 is “Religious Freedom Day” in the United States. The celebration commemorates the same day in 1786, when Virginia passed its “Statute of Religious Freedom”. Written by Thomas Jefferson, it protected what would later be enshrined in the First Amendment of the U.S. Constitution. Government should neither “establish” a religion nor prohibit its “free exercise”.

Today, most Americans value religion, but they differ considerably in their understanding of it. You can be a Baptist or a Mennonite; a Catholic or a Protestant; a Christian or a Hindu; a theist, a deist or an atheist—and it’s okay. It’s wonderful that we can mostly get along.

A recent book, American Grace by Robert Putnam and David Campbell, sheds light on this topic by focusing on the last 60 years of American cultural history. But I want to commend another book to your reading: From Tyndale to Madison by Michael Farris.

Farris makes clear that religious freedom should not be taken for granted; it is rare within the scope of world history. We properly look down on Muslim countries where religion is enforced through social and legal pressures and violence. We rightly criticize China for persecuting those in “house churches”. But the historical norm—even in Europe and the American colonies—was the use of government power to grant monopoly power to a religious sect in each country.

Farris covers the amazing history of religious intolerance and the tenacious battle for religious freedom in Europe (especially England) and America. He opens with William Tyndale’s martyrdom in his quest to publish his translation of the Bible in the 1520s—and concludes with the rhetoric and legislative work of James Madison through the 1780s.

Staggering Persecution

Farris details brutal repression over religious differences—even in America, but especially in England. Farris describes the saga of Henry VIII and his wives at length—and its impact on Catholicism in England. The changing tides after Henry, between Catholics and Protestants, included the reign of “Bloody Mary”. Her regime put John Rogers to death (the first of 283 Protestants), leaving behind a wife and 10 kids. Perotine Gosset gave birth while being burned alive. The baby boy was snatched from the flames by bystanders, but then thrown back into the fire by the sheriff.

In England, pastors were required to divorce their wives and leave their children—when the country moved back to Catholicism. In America, authorities resorted to “cropping” ears and branding cheeks. Ferris also describes two females who were strip-searched n Boston for being Quakers. As William Henry Foote described the early governance in Virginia: “The company knew not how to control the members composing the colony but by religion and law. They exercised a despotism in both.”

Authorities would burn Bibles and “heretical” books. They would punish people for preaching, owning a Bible, or meeting in a home church. It was illegal to translate the Bible into English or to own an English Bible. Possessing the Latin Bible was legal. Much like Islam and the Koran today, you could be punished for not having the Scriptures in the (only) authorized language. Again, these crimes were, at times, punishable by death.

To generalize, early in the time period, those who had alternative beliefs and practices could be put to death. Later, governments “moderated” and used regulation to limit competition for the “established” church—with fines and prison to discourage dissent. Even into the Revolutionary War, one needed a license from the government to preach as a Baptist in Virginia.

Trying to Preserve the Monopoly

After Bloody Mary, Queen Elizabeth pursued moderation—with interesting and unintended consequences. Farris (98-99): “Rejecting both Catholicism and revenge, Elizabeth pursued a policy demanding outward conformity with the rituals of the reinstituted Protestant church. Her policy purported not to coerce the conscience. It was not a violation of the law simply to believe the wrong doctrine…This insistence on religious unity was primarily grounded in political reasoning…By demanding religious acts for a secular purpose, Elizabeth unwittingly sowed seeds of destruction to the concept of a [politically] Christian nation that had prevailed unbroken since the days of Augustine.”

Farris also details the broader stepping stones to religious competition. Some of these steps were “economic”. Practically, getting the Bible to laypeople required an increase in literacy, the invention of the printing press, and the work of translators. Literacy increased steadily over this period; Johannes Gutenberg’s press changed the world; and Tyndale led the charge to translate the Bible into English.

From there, the concerns are largely political. Why would one prohibit other sects of Christianity? Motives ranged from doctrinal (a desire to limit and punish “heresy”) to political (a unified religion would promote a unified State) and economic (the established church did not want competition). Another factor, in the days of Tyndale and Thomas Cranmer, might have been the amazing and embarrassing Biblical illiteracy of the priests.

These tensions have their most famous origins in the debate between Tyndale and Sir Thomas More. Farris notes that More was initially an advocate of learning, but later became an advocate of ignorance. He had a heavily paternalistic concern about laypeople reading the Bible on their own. He “repeatedly suggests it would be better if the Bible had never been written” (27)—since it was being used to critique the (Catholic) Church. More is famous for the vision of toleration in his 1516 book, Utopia. But that was theoretical; the turmoil undermining his favored church was actual. With Tyndale and the Bible undermining the Church’s monopoly, More connected “heresy” with sedition. (His concerns extended to particular aspects of Tyndale’s translation. For example, he preferred the term “charity” to “grace”, since it implied giving money to the Church.

More’s rhetoric in death was poignant but hypocritical. Farris (35-36): “Taken in isolation, More’s action makes a compelling case for the freedom of conscience. The echoes of More’s vindictive words against Tyndale’s claim of freedom of conscience, however, shatter his saintly image…He argued for a right for himself that he had previously denied to others.”

A few years later, a similar debate on freedom of conscience in religion occurred between John Calvin and Sebastian Castellio on the heresy of Michael Servetus. Farris devotes a chapter to Calvin coming out on the (More) wrong side of the debate.

Moving Toward Religious “Competition”

In the face of religious, economic, and political incentives to pursue monopoly power in religion, how would people gain and maintain the right to hold religious beliefs and engage in religious practices—for example, to obtain a Bible, to talk about it with others, and to gather in groups of like-minded believers? These are the basic and vital freedoms enumerated in the First Amendment: freedom of the press, of speech, and of assembly.

The politics were driven—over a long period of time and through much effort, courage, and sacrifice—by Scripture, the ideas of the Enlightenment, and a growing belief in the efficacy of limited government. Although most of the credit is typically given to the (secular) Enlightenment, Farris makes the case for the idea that one “ought to surrender as little as possible to the civil government” and the primary role of Scripture, especially in the American context. The bulk of the credit should go to faithful people who were willing to tolerate massive persecution.

Farris points to many heroes of religious freedom. Some, like William Penn and especially Roger Williams, are relatively well-known. Others were historically obscure. My favorite story was a Baptist preacher, Elijah Craig, who was imprisoned in Virginia a few years before the Revolutionary War. He preached within the prison and the jailers responded by building a wall around the jail to make it more difficult for people to hear him.

Preachers and laypeople made the argument for “freedom of conscience” from passages such as Romans 14:5’s “each one should be fully convinced in his own mind”; Romans 14:23’s “the man who has doubts is condemned if he” engages in the activity; and I Corinthians 10:15’s “judge for yourselves”. And they made almost-constant reference to the Bereans of Acts 17:11—who “were of more noble character…for they received the message with great eagerness and examined the Scriptures every day to see if what Paul said was true.” What a remarkable example in any age—but especially in a time when such “nobility” was being threatened with imprisonment and death!

Logic played its part too. Why did government have the right to grant (and thus, take away) such rights? Why would a Christian insist on uniformity instead of the Biblical concept of “unity”. Why should “proper Christianity” be defined by national boundaries? If country A says X is correct and country B says Y is correct, then how do we know which country is infallible? And if government should define proper religion, should one depend on the legislative, judicial, or executive parts of government.

Some observed that the true Church never persecutes, but is instead persecuted. As James Madison put it: “That diabolical, hell-conceived principle of persecution ages among some and to their eternal infamy, the clergy can furnish their quota of imps for such business.”

How to Institutionalize Religious Freedom?

As religious “tolerance” became more prevalent, some argued that this enlightened attitude was sufficient, even with a government-established religion.

The Federalists opposed the Bill of Rights as unnecessary and ineffective—what they saw as merely a “parchment barrier”. They couldn’t imagine that a legislature would be an impediment to freedom of conscience, when all previous advances on this in England had come through legislatures (in opposition to royalty). Moreover, the idea of written constitutions in a republican form of government was new. (And as we see today, they can be easily abused.) Finally, they thought it would be unnecessary since the federal government only possessed enumerated powers and would lack authority to restrict rights

But others including James Madison prevailed, in what became the First Amendment, arguing that laws based on tolerance could be revoked. These rights were not to be given—and thus perhaps taken in a less-tolerant time—by government. Freedom of conscience in religious matters was seen as endowed to us by God, rather than granted to us by a government.

As Patrick Henry put it: “You are not to inquire how your trade may be increased, nor how you are to become a great and powerful people, but how your liberties can be secured; for liberty ought to be the direct end of your government.” And these liberties extend to religion.

We owe a lot to those who were persecuted and even martyred—that we can believe and practice religion (or not) according to our convictions. With impending death at the stake, Hugh Latimer said to Nicholas Ridley: “Be of good comfort…we shall this day light such a candle by God’s grace in England as I trust never shall be put out.” God graciously answered that request.

Whether you are a Methodist in Maine, a Catholic in California, or an Atheist in Arkansas, say a little prayer today, expressing thanks for those who made the effort—“from Tyndale to Madison”—so that we could have religious freedom.