My OperaA Brief History of the Mortgage Interest Deduction
Wednesday, August 25, 2010 12:38:51 PM
A Brief History of the Mortgage Interest Deduction
Posted By Barry Ritholtz On August 25, 2010 @ 8:25 am
I keep finding very poor or misleading reporting on Housing in the US. Some of this is sloppy or lazy reportage; others reflect reporters being suckered by Think Tank spin.
Lately, I have been reading misleading coverage of the Mortgage Interest Deduction. The impression that gets conveyed is that this deduction was a specific policy designed to encourage home ownership. That is a false narrative, belied by history of the Federal Income tax.
Let’s take a very quick look at that so people understand it better.
The first Federal income tax in the US was passed in 1894, and subsrequently struck down by the Supreme Court. This led to the passage of the Sixteenth Amendment (ratified in 1913), that empowered Congress “to lay and collect taxes on incomes, from whatever source derived.”
So with this power, Congress imposed the first taxes. Rates started at 1%, and rose to a whopping 7% for taxpayers with income in excess of $500,000. Less than 1% of the population paid income tax.
As an offset for the taxes, any interest paid for any reason was deducted. It was considered a business expense. Indeed, taxes on rents from real estate was a large income source. The financing costs of purchasing such rent producing property — aka interest payments — was a ordinary business expense, and hence, deductible.
Keep in mind that during the pre-WW1 period, there was very little interest expenses paid by individuals. Home owners typically owned their houses outright (except for farmers, who either financed or leased the land). There were no credit cards, HELOCs, revolving credit, or student loans.
The deduction on interest was never intended to be a salve to the middle class. It was not designed to encourage home ownership. Indeed, when the interest rate deduction was first considered, home financing was non-existent, and home ownership was not thought of as a public policy. It is not part of a grand scheme.
The entire home mortgage deduction is little more than a historical anachronism, a carry over from when all interest payments were deductible
Now you know . . .
Posted By Barry Ritholtz On August 25, 2010 @ 8:25 am
I keep finding very poor or misleading reporting on Housing in the US. Some of this is sloppy or lazy reportage; others reflect reporters being suckered by Think Tank spin.
Lately, I have been reading misleading coverage of the Mortgage Interest Deduction. The impression that gets conveyed is that this deduction was a specific policy designed to encourage home ownership. That is a false narrative, belied by history of the Federal Income tax.
Let’s take a very quick look at that so people understand it better.
The first Federal income tax in the US was passed in 1894, and subsrequently struck down by the Supreme Court. This led to the passage of the Sixteenth Amendment (ratified in 1913), that empowered Congress “to lay and collect taxes on incomes, from whatever source derived.”
So with this power, Congress imposed the first taxes. Rates started at 1%, and rose to a whopping 7% for taxpayers with income in excess of $500,000. Less than 1% of the population paid income tax.
As an offset for the taxes, any interest paid for any reason was deducted. It was considered a business expense. Indeed, taxes on rents from real estate was a large income source. The financing costs of purchasing such rent producing property — aka interest payments — was a ordinary business expense, and hence, deductible.
Keep in mind that during the pre-WW1 period, there was very little interest expenses paid by individuals. Home owners typically owned their houses outright (except for farmers, who either financed or leased the land). There were no credit cards, HELOCs, revolving credit, or student loans.
The deduction on interest was never intended to be a salve to the middle class. It was not designed to encourage home ownership. Indeed, when the interest rate deduction was first considered, home financing was non-existent, and home ownership was not thought of as a public policy. It is not part of a grand scheme.
The entire home mortgage deduction is little more than a historical anachronism, a carry over from when all interest payments were deductible
Now you know . . .
