Until the mid 1980s, people could deduct consumer interest from their income tax. In effect, that encouraged people to have a lot of debt since they could deduct automobile interest, credit card interest, and just about any other kind of interest from their taxes. The law was changed in the mid 1980s and that deduction was phased out over a few years. The goal was to eliminate some deductions but to also lower the marginal tax rates to offset the loss of the deductions. Personally, I think that was the right thing to do. Encouraging people to be in debt is bad policy, IMO.

It's said that the power to tax is the power to destroy. By manipulating the tax code, you're manipulating people's behavior. Granting deductions for some things while eliminating it for other things affects the purchasing decisions that people make. For example, for some reason, business owners that purchased vehicles weighing over 6,500 pounds were granted some extremely generous tax advantages a few years ago. That encouraged people to buy Hummers and other huge vehicles whether they needed them or not. It also serves as a form of corporate welfare for those businesses that benefit from the tax break.

By allowing people to deduct mortgage interest, points, and the like, you're effectively subsidizing the mortgage companies. They can charge higher rates and tell their customers that those higher charges are tax deductable. Remove the deduction (over time) and they'll have to be more competitive, especially with regard to fees and points. Likewise, encouraging people to buy homes more expensive than they can afford is bad policy, IMO. It also fuels the speculation that's driving housing prices to absurd levels. Doing anything would be a very bad idea, though, because it could cause a crash in housing prices. Those most vulnerable would be those who took out those "interest only" mortgages.

Tax deductions can easily be a trap if you aren't careful. A deduction lowers your tax bill by the amount of the deduction times your marginal tax rate. For example, if someone is in the 30% tax bracket, $10,000 of deductions lowers your taxes by $3000. To me, it makes more sense to pay the extra $3000 and keep the $7000 difference. My wife and I worked hard and paid off our house. We're 100% debt free. While that means we pay a higher effective tax rate than other people with our income, we're left with a net of more money. In the end, it's not what you make that counts but what you have left over when all is said and done.