Idealism and the Mortgage Interest Deduction

After learning to see the world through the lenses of economics, one of the things that most startled me was how different the world looked even though I had exactly the same values that I had had when I accepted the views of Harper's Magazine, Utne Reader, Mother Jones, etc.

A specific case: Why aren't do-gooders outraged by the home mortgage interest deduction? It is an enormous factor in our economy ($779 billion in 1999 vs. around $400 billion total spent on K-12 education) that:

1. Primarily benefits high income people; the higher your mortgage (up to $1 million on up to two homes) the more you benefit. It is a case study in effectively regressive taxation. See http://www.taxfoundation.org/prmortgage.html for how a flat tax that eliminated the mortgage interest deduction would primarily harm those with homes over $300,000.

2. Provides a huge incentive to build or buy bigger homes. Commentators sometimes rant about "real estate porn" when they see ads for enormous homes - and yet, through the mortgage interest deduction the government subsidizes large homes. One would have thought the environmental movement would also be outraged by this - Insofar as one is concerned that we are using too much energy or killing too many trees, one might try to fight this massive payment system that encourages people to build bigger houses.

I can only come up with two reasons why this obvious case of rent-seeking by the wealthy, the real estate industry, and the banking industry has been almost completely ignored by do-gooders:

1. The profound emotional resonance of home ownership is so powerful that either do-gooders believe it (most likely, I'm afraid) or they are strategically afraid to call it into question. What a beautiful emotionally-laden cover for bankers and developers.

2. People become so entrenched in traditional ruts of argumentation that it never occurs to them to quit debating whether or not we should have a flat tax so that they fail to notice this monstrous regressive feature of the existing "progressive" tax code.

One of the reasons that I no longer pay any attention to Harper's Magazine, Utne Reader, Mother Jones, etc. is that they don't usually provide much original thought even regarding the consistent application of their own principles.

To add outrage to outrage, Voith makes the case that the mortgage interest deduction is implicated in the dynamic that creates our disastrous inner-cities, http://www.phil.frb.org/files/br/brma99rv.pdf. This is an amazing argument, brilliant economic analysis that typifies the unintended consequences of a beloved policy (the rhetorical tug of home ownership is right up there with baseball and apple pie). Why don't Utne or Mother Jones report on this stuff!

In the absence of understanding economics, people are prone to believe that somehow Americans simply have the wrong preferences. Do-gooders often wish that people would spend more on education and less on monster houses. But the government is bribing people to buy monster houses while also forcing them to pay for meaningless K-12 education whether they use it or not. In the absence of government influences, houses would be smaller and more would be spent on education.

Moral outrage should not be directed at people's preferences (outrage concerning individual consumer decisions, while satisfying in an atavistic way, is simply not an effective means of changing behavior in a large, pluralistic society) but rather should be directed at those policy distortions that cause those outrages (laws can be changed by means of outraged public opinion).

For more on the mortgage interest deduction, see http://post.economics.harvard.edu/hier/2002papers/HIER1979.pdf, which concludes that there are small positive externalities associated with it (they include local political activism as a positive externality, whereas I suspect that it is usually really rent-seeking) but that it does primarily benefit the rich, banking, and real estate industries while not much increasing levels of home ownership.

The best guess of flat tax advocates in the U.S. is that even if we got one, the mortgage interest deduction would be untouchable.

High Taxes Wither Away

From a fabulous WSJ article:

"High Taxes Wither Away: Former communist countries lead the way in abandoning progressivity.

. . . In 1994, newly independent Estonia borrowed the idea of the flat tax from highly prosperous Hong Kong, which 45 years before had introduced a dual income tax system, allowing taxpayers to pay a flat rate on their gross income. (In practice, almost everyone in Hong Kong pays the flat tax.) Lithuania and Latvia quickly followed Estonia's lead. Today, all three Baltic states are booming, and, along with Slovakia, a recent convert to the flat tax, they are the least-taxed countries in the European Union.

The success of the Baltics attracted the attention of Andrei Illarionov, Russian president Vladimir Putin's economic adviser. At his suggestion, Mr. Putin implemented a 13% flat tax for individuals, along with a 15% rate for most business income. The results have been astonishing as Russia's black-marketers decided the tax was low enough and transparent enough that it wasn't worth evading.

After struggling for a decade, Russia's economy grew 5% a year after inflation in 2002 and 2003 and 7.3% last year. The flat tax has been a key reason that revenue from the country's personal income tax has grown by 150% since 2001. "This constant expansion of the government tax revenue is the result of less tax evasion and increased incentive to work, save, and invest," noted the Adam Smith Institute in London in a report on the flat tax's success.

Russia's experience set off a wave of imitators. In 2003, Serbia introduced a 14% tax on income and corporate profits along with plans to cut it further. Russia's neighbor, Ukraine then set a 13% rate, with dividends and bank interest taxed at only 5%.

Last year Slovakia junked an old tax system that included 66 exemptions, 19 sources of untaxed income and 27 items with their own specific tax rates. Instead it put in place a 19% flat tax on income and profits. In December Jan Oravec, president of Slovakia's Hayek Foundation, told me that the country's flat tax has helped sustain an economic growth rate of 4.9%, lowered unemployment and led to a surge in surge in tax revenues as people take advantage of the new opportunities to work and invest. Last year, the World Bank named Slovakia the world's top economic reformer in 2004 for improving its investment climate.

It was in Slovakia last week that Mr. Bush privately told Mr. Putin how much he admired Russia's success in implementing the flat tax. Later, in public comments, he praised his Slovakian hosts for their flat tax, which "has helped to attract capital and create economic vitality and growth."

Alvin Rabushka, a senior fellow at Stanford's Hoover Institution who consults with countries all over the world on how to design a flat tax, can barely keep up with all the new adherents. Within two weeks after taking office in December, Romania's new prime minister, Calin Popescu Tariceanu, issued an emergency edict to take effect only three days later: Companies and individuals now pay a single flat rate of 16%. Georgia also adopted the flat tax as of Jan 1.
Europe is becoming so crowded with flat-tax nations that the original proponents of the idea are having to play catch-up. Estonia has just cut its rate to 24%, and has promised to slash it to 20% over the next two years. Mr. Rabushka's book "The Flat Tax" has just been published in Chinese, with a preface by Lou Jiwei, the vice minister of finance. If China were to climb on board the flat-tax train, more than a quarter of the world's population would be filling out their taxes on the back of a postcard. . .

It is . . . ironic that every country that has adopted the flat tax is a former communist nation--except Hong Kong, the modern originator of the concept, which has seen its new communist rulers retain the flat tax as a centerpiece of its economic policies.

Given all this, why should the U.S. allow itself to continue to see its economic potential limited by a Marxist concept that most nations that followed that path are now fleeing from?"

Full article, http://www.opinionjournal.com/diary/?id=110006352

Creating One's Inner Life

I do believe it is possible to create, even without ever writing a word or painting a picture, by simply molding one's inner life. And that too is a deed. ~ Etty Hillesum

FLOW Ideal: A world of healthy, happy people doing good and having fun.

I want to do good and have fun doing it. I expect that most people would also like to be doing good and having fun doing it. We can help to create a world in which most of human life, most of the time, consists of doing good and having fun doing it.

In order to do so, we need to dramatically change many of our institutions, not just once, but over and over and over again. We need dramatic, ongoing change in all of the institutions of our society. We need to embrace the process of creative destruction enthusiastically; we need to celebrate the forward motion of an ongoing process of innovation and entrepreneurship that will bring happiness for all into the world.

In Maslow’s hierarchy, once people’s more basic needs for food, shelter, and safety, have been met, they then crave love, esteem, and self-actualization. In the developed countries, almost everyone’s basic needs have been met. In the “emerging economies,” we know that opening the world will allow the basic needs of almost everyone on the planet to be met. Thus the fundamental problem is how to allow people’s needs for love, esteem, and self-actualization to be met more effectively.

At present, many people seem to believe that money, power, and formal status (e.g. a title, “Professor so-and-so,” or “Chief Undersecretary so-and-so”) are required to get their esteem needs met. But this is an entirely arbitrary approach. Human beings are tribal animals that have been genetically programmed to seek hierarchy and status within their tribes. But the wonderful thing about the world today is that we can create new tribes with new standards for the distribution of status.

Some people are perfectly content with existing status hierarchies. For some people, it is utterly okay with them that Donald Trump is respected for being rich and gaudy, or President Bush is respected for being powerful, or Noam Chomsky is respected for being a famous intellectual. Let them enjoy their status hierarchies. Let them be.

Other people are frustrated and unhappy with existing status hierarchies. They believe that there is something morally bankrupt about a society that respects wealth, power, or position. Wonderful! Let them criticize by creating. Let them create new communities, with new ideals, and new status hierarchies.

There are open source communities in which Linus Torvalds is the ultimate hero. There are athletic communities in which Lance Armstrong is the ultimate hero. Riane Eisler wants to create a “partnership” society instead of a patriarchy or a matriarchy. Go Riane! Tim Munson wants to create “new technologies of meaning.” Go Tim!

Is it easy to create new communities with new status hierarchies? Not at all. No one ever claimed that worthwhile achievement was easy, ever. Is it worth attempting? Of course.

The only Greek expression that I remember after two years of Greek is Ta Kala Xalepa: “That which is beautiful or noble is difficult and worth striving for.”

We need to create an honorable, pluralistic ethos according to which we acknowledge that many people are dissatisfied with many things in our society – fine, we welcome dissatisfaction as the source of craving for the good. But we never accept whining or criticizing of others or critiques of “society.” If you don’t like it, go fix it, go create a world, a community, a sub-culture in which your ideals can be instantiated, realized, in which you can show us what your vision of beauty and nobility looks like. Create a new social reality, so that I can see your dreams come true. I want to see a world in which billions of dreams are coming true constantly.

Criticize by creating.