Originally posted by spruce112358
Yeah, well, that's the kicker isn't it? The policy was supposed to increase home ownership -- but as more people started buying homes, prices went up -- which stopped the whole thing in its tracks.
Government just ain't so bright on certain things.
Actually not:
The first modern federal income tax was created in 1894. Interest — all forms of interest — was deductible; the Supreme Court, however, quickly ruled that the tax was unconstitutional. In 1913, the Constitution was amended and a new income tax was enacted. Once again, interest was deductible.
There is no evidence, however, that Congress thought much about this provision. It certainly wasn\'t thinking of the interest deduction as a stepping-stone to middle-class homeownership, because the tax excluded the first $3,000 (or for married couples, $4,000) of income; less than 1 percent of the population earned more than that. The people paying taxes — Andrew Carnegie and such — did not need the deduction to afford their homes or their yachts.
There is another reason Congress could not have had homeownership in mind. The great majority of people who owned a home did not have a mortgage. The exceptions were farmers. But most folks bought their homes with cash; they had no mortgage interest to deduct.
When Congress made interest deductible, it was probably thinking of business interest. Just as today, the aim was to tax a business\'s profits after expenses had been netted out, and interest was an expense like any other. In a nation of small proprietors, basically all interest looked like business interest. Whether it was interest on a farm mortgage, or interest on a loan to purchase a tractor, or interest charged to a general store that purchased its inventory on credit, it all would have looked like a business expense. Credit cards did not exist. So Congress just said, \"Deduct it.\"
It was not until the 1920\'s and the spread of the automobile that home mortgages outnumbered farm mortgages. In the 1930\'s, the mortgage industry got a huge assist from the feds — not from the tax deduction, but from agencies like the Federal Housing Administration, which insured 30-year loans, and, over time, the newly created Federal National Mortgage Association, or Fannie Mae. Before then, the corner bank would issue a mortgage and wait for the homeowner to pay them back; now savings and loans could replenish their capital by selling their mortgages to Fannie Mae — meaning they could turn around and issue a new mortgage to someone else
http://www.taxfoundation.org/blog/show/1382.html
It's been retained because it's a sizable tax giveaway to the upper-middle and wealthy and they are the ones who wield political power.