Is the American Middle-Class Hurting?

Though there is no dearth of policy ideas designed to address the plight of middle-class households, not many of these policies have actually been implemented. Which of these proposed ideas could best help the struggling American middle class, and what impediments stand in the way of bringing them to fruition?

A new Brookings report looks at four potential policy changes that could find bipartisan appeal, paired with four revenue-raising proposals that could fund each of them. Taken together, the package would be deficit-neutral.

Tax Credit for First-Time Homebuyers

Brookings’ William Gale argues for a fairer and more efficient framework for housing policy. Gale proposes replacing the mortgage interest deduction (MID) with a one-time refundable tax credit for first-time home buyers.

At an estimated cost of $20 billion per year, a credit of $10,000 for each new homeowner would be less regressive and less costly than the MID, and it would “encourage homeownership, not home indebtedness,” Gale said. He added that this policy could be funded by eliminating the mortgage interest deduction.

The mortgage interest deduction does not help increase homeownership rates, Gale argues, and he suggests that it disproportionately benefits high-income households—the top quintile receives 80 percent of the benefits from the mortgage interest deduction, the report revealed.

Worker Tax Credit

The worker tax credit proposes to supplement workers’ incomes by 15 percent of their earnings, up to $ 1,500 per year, by imposing a carbon tax of $27 per metric ton of CO2. A carbon tax starting at $27 per metric ton of CO2 and rising at 5 percent per year over inflation is estimated to bring in $1 trillion over 10 years, the report stated.

Paid Family Leave

The bipartisan AEI-Brookings Working Group on Paid Family Leave proposes a federal policy providing mothers and fathers with eight weeks of paid parental leave, at a wage replacement rate of 70 percent, up to a cap of $600 per week. This would cost up to $13 billion dollars annually, but the report suggests it could be supported by imposing a payroll tax of $1.30 per week for the median full-time worker.

Child Savings Accounts for College

Under this proposal, initial seed funding from the government would start at $10,500 for low-wealth children. The estimate is that the proposal would allow all children to turn 18 with approximately $40,000 in dedicated educational assets, costing the government $42 billion per year. This expense could be balanced by lowering the exemption on the estate tax to $1 million, the report found.

Read the full report here.