The necessity of funding the Civil War led to the creation of the income tax on Americans and the Internal Revenue Service. The initial rates were 3% if you earned more than $600 annually and 5% if you made more than $10,000. The income tax was discontinued in 1872.
Congress tried to reestablish the income tax in 1894; however, the Supreme Court ruled it as being unconstitutional. The primary source of income to run the government was tariffs. When tariffs were reduced, another source of income was needed. Congress passed the 16th Amendment to the Constitution in 1913, making the income tax a major source of income for the federal government.
Interest paid was considered a deductible expense from the beginning of the income tax. However, few Americans were able to use this deduction because the provisions of the income tax code only required payment of income tax after a family reached an income level that few Americans actually earned.
Few Americans had interest payments. They saved money until they could buy a house. The main beneficiaries of the interest deductions were businesses.
In the 1930s, Americans had started taking out mortgages for home purchases, and the home interest deduction became the fuel that helped establish the American middle class. The ability to reduce your income taxes with mortgage interest made it possible for the middle class to purchase a home without waiting for years to save the money needed.
While this wasn’t in the mind of Congress when it passed the 16th Amendment, the income tax created the unexpected result of stimulating home ownership. Beginnings often have unexpected outcomes. What was created to resolve one problem often led to an unexpected benefit in a totally different area.
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“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” – The 16th Amendment