The Peculiar Political Economy of Reverse Grandfathering
By Bryan Caplan
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
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.