Bryan Caplan  

The Peculiar Political Economy of Reverse Grandfathering

PRINT
Big Brother Does Not Always He... Central banks should have list...
I've spent the last seventeen years trying to max out my mortgage interest deduction.  So when I first read about the new Republican tax plan, my heart sank.  Curses!  Will all my careful scheming be brought to nothing? From the Washington Post:
The change to the mortgage interest deduction drew immediate attention Thursday. Under current tax law, Americans can deduct interest payments made on their first $1 million worth of home loans.
Minutes later, however, I breathed a sigh of relief.  As is often the case in politics, I'm going to be grandfathered:
The bill would allow existing mortgages to keep the current rules, but for new mortgages, home buyers would be able to deduct interest payments made only on their first $500,000 worth of loans.
So who's left to stand up for future home-buyers?  Per Olsonian logic, future home-buyers themselves are all but silent, but the industries that plan to serve them are vocal indeed:
At least one major industry group, the National Association of Home Builders, announced days before the bill was released that the group would not support it, and others joined the attack within minutes of the measure's unveiling.
Which raises an interesting question: Instead of lobbying to preserve the status quo, why doesn't the construction industry lobby for reverse grandfathering?  Instead of limiting the full deduction to existing homeowners, why not do the opposite and limit it to new homeowners?  To quote Winston Smith in 1984, "Do it to Julia! Not me!"

If this sounds bizarre, note that rent control provisions often exempt new construction, at least for a time.  Long-run credibility aside, there's a simple rationale: Exempting new units from regulation preserves (or even strengthens!) the incentive to keep building.  The construction industry could easily push for parallel reverse grandfathering.  So why not?

My preferred answer is that construction lobbyists have a Caplanian theory of lobbying.  Nakedly pushing for big unpopular policies is hopeless.  Instead, savvy lobbyists focus on boring but profitable details of crowd-pleasing policies.  Only the construction industry wants a mortgage interest deduction limited to new construction, so pushing for this policy is futile.  But wide swaths favor the mortgage interest deduction in general terms - and few have pondered whether it should be limited to current homeowners or apply to everyone.  The smart play for the industry, then, is to forget grandfathering is even on the agenda, and defend their favorite tax loophole.  Which is precisely what they're doing.

Not, contrary to Scott, that there's anything wrong with that...




COMMENTS (8 to date)
John Thacker writes:
I've spent the last seventeen years trying to max out my mortgage interest deduction.

Trying to max out the amount of principal subject to it, surely, since taken literally this means that you've intentionally sought higher interest rates than necessary in order to get a larger deduction, feeling it more moral to pay a private lender in order to decrease taxes.

An interesting thing about the mortgage interest deduction is that if it raises the price of houses, it presumably somewhat negatively effects foreign purchasers of property who do not use it as rental property (but perhaps as a second home). That is, so long as most of their income is still foreign based. Such a thing would be unsurprising, considering that your own book demonstrated how public policy is subject to anti-foreign bias.

Is there any level of anti-foreign bias or other bias in a tax deduction or "loophole" that would cause you to feel that there was something wrong with defending it? Would you cheerfully defend total exemption from income tax for public employees, for citizens, for those born in this country as opposed to immigrants, for particular racial groups (majority or minority). Back in the 18th century would you have eagerly supported exemption from income tax for nobility and clergy?

You would say it would not be wrong for people to defend any of these, even when the offered alternative was a net tax cut, even when the easily foreseeable outcome of defeating the alternative was keeping the highly biased system?

I cannot say that there is nothing ever wrong with defending a tax loophole. That categorical statement goes too far, even if it is unsatisfying not to have a bright line.

mike writes:

One other thought, is that actually the best thing for a builder is the full subsidy continuing.

Of course the builder wants the tax / interest deduction / subsidy for new builders. That is obvious.

However, one thing builders compete against is the value of existing homes. And in a perverse manner, the higher the other homes, the better. If an existing home is $300k, the builder maybe can charge $400k for a new one. If the tax / interest deduction change making the existing homes only sell for $250k, then probably harder to charge the full $400k, and maybe can only charge $350k. I think that is perfectly rational why they want the whole thing

Brandon Berg writes:

Or as I like to put it, populism is the handmaiden of cronyism.

Hazel Meade writes:

I'm a bit confused by the comment about maxing out your mortgage interest deduction too. Money spent on house is still money you can'tspend on other things

Ron W. writes:

Eliminating the mortgage deduction on future mortgages reduces the value of all houses, not just future houses. That's why the construction industry wants to avoid keep the deduction on all mortgages.

Trent McBride writes:
I'm a bit confused by the comment about maxing out your mortgage interest deduction too. Money spent on house is still money you can't spend on other things

One could favor longer amortization (30 over 15), and/or occasionally cash-out refinance (or get home equity loans), and invest the proceeds, thereby leveraging low-cost borrowing (made lower by tax deduction) to boost investment returns.

Gena Kukartsev writes:

Bryan, could you shed light on your intriguing statement

I've spent the last seventeen years trying to max out my mortgage interest deduction.

As John Thacker and Hazel Meade and Trent McBride, I wonder what you mean, mostly for the most practical reason: are you doing something that I should be doing too? :)

Does it mean that you try to maintain the max $1M principal balance taking advantage of a relatively low interest rate, not lowering the principal through refinancing or equity loans (are they eligible?) or some other mechanism?

Gena Kukartsev writes:

Bryan, could you shed light on your intriguing statement

I've spent the last seventeen years trying to max out my mortgage interest deduction.

As John Thacker and Hazel Meade and Trent McBride, I wonder what you mean, mostly for the most practical reason: are you doing something that I should be doing too? :)

Does it mean that you try to maintain the max $1M principal balance taking advantage of a relatively low interest rate, not lowering the principal through refinancing or equity loans (are they eligible?) or some other mechanism?

POST A COMMENT




Return to top