Four policies to help the middle class, and how to pay for them

Monday, November 5, 2018
Brookings

Behind the daily headlines of our turbulent political climate is a stark, hard fact: the American middle class is hurting. Household incomes for the middle 60 percent of the distribution are rising, but painfully slowly, and primarily due to more work (including longer hours) rather than better wages. As the economy continues its long climb back after the Great Recession, the middle class are still feeling the squeeze, in terms of both money and time. Whichever party is in power in Congress after the midterms, an immediate priority must be to bolster the quality of life for our middle-class families.

There are plenty of policy ideas floating around, many of them good. But making them a reality requires two political feats: galvanizing congressional support and addressing fears about the fiscal impact of new spending. In the spirit of offering a positive agenda for the middle class, we offer four proposals that ought to find bipartisan appeal, paired with four revenue-raising proposals that could fund each of them. Taken together, the package would be deficit-neutral.

Lists four policy ideas to help the middle class, and how to pay for them

1. A WORKER TAX CREDIT

In her new book, The Forgotten Americans, our colleague Isabel Sawhill reminds us that most Americans want to earn their own living. But middle-class income growth has been tepid for decades, leaving many workers feeling like they are running in place:

Middle class has slowest income growth

Cumulative growth in average income after taxes and transfers by income group

LowestQuintileMiddleThreeQuintilesHighestQuintile199020002010197920140%20%40%60%80%100%-10%120%

 

Source: Congressional Budget Office, 2018, "The Distribution of Household Income, 2014." Summary Figure 2. Inflation-adjusted using the price index for personal consumption expenditures.

Brookings Watermark

Sawhill proposes a worker tax credit similar in design to one described by Elaine Maag. Think of it as an Earned Income Tax Credit (EITC), but with greater support for childless workers and without work disincentives for secondary earners. It would provide a credit equal to 15 percent of individual earnings up to a cap of $1,500 per year and would help all workers earning less than $40,000 a year, for an estimated cost of $868 billion over ten years.

…funded by a carbon tax.

But can we afford it? Aparna Mathur and Adele Morris suggest using a carbon tax to pay for an expanded EITC (which could take the form of a worker tax credit). A carbon tax is a worthy policy goal in its own right, to reduce CO2 emissions, and a wage subsidy for low- and moderate-income workers could more than offset the tax’s regressivity. 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.

Read the full article here