Interesting Deduction History

The first income tax in 1913 had a deduction for interest expenses. It was for all types of interest, not just mortgage interest. In fact, hardly anyone had home mortgages in those days. Interest was mainly a business expense. Therefore it made some accounting sense in those days. The idea was to tax income after all costs of producing it. Interest was a cost of producing income. It was mainly after World War Two that it came to be seen as an instrument of social policy. It was thought of as a support for home ownership--part of the American Dream. All forms of interest, including credit card interest, continued to be deductible until 1986. Since then only mortgage interest has been deductible. In addition, some restrictions were put on people who have large mortgages or multiple properties. A lot of lip service was paid to the American Dream aspect of the mortgage deduction, but the main thing it did was support the housing industry, which has always been a major driver of the American economy. As goes the housing industry, so goes the American economy, to a significant extent. That is one reason for the continuing malaise in the economy: the housing industry is still ailing. It is certainly arguable that excessive pushing on the goal of home ownership, and providing tax and other incentives for it, was one of the things that led to the crash that is still affecting us all. One of the ideas for tax simplification that has been a subject for debate in the last several years is the elimination of the mortgage interest deduction. A bipartisan congressional panel assembled by President George W. Bush recommended replacing it with a tax credit. This suggestion produced an uproar from a number of directions, including from real estate agents and home builders. Tax reform remains an elusive dream, but if it does come about, a change in the mortgage interest deduction could be a part of it.