Your question simply concerns the difference between first-order logic (where the distinction is maintained) and second-order logic / higher-order logic, where propositional variables are indeed simply variables, and therefore terms.

Early work (Frege's Begriffschrift, Whitehead and Russell's Principia Mathematica) used stronger logics, while first-order logic was isolated later. FOL is no "better" than those stronger systems, and indeed higher-order logics are generally preferred for interactive theorem proving.

More discussion [here][1].


  [1]: http://philosophy.stackexchange.com/questions/2617/how-did-first-order-logic-come-to-be-the-dominant-formal-logic