More taxation of capital gains and estates could help shrink the United States’ wealth gap from the top down. The gap must also be closed from the bottom up, by bolstering access to the three key ingredients of middle-class wealth: owner-occupied homes, which represented the majority of household wealth for most people in 2019; financial assets, such as stocks, whose value, measured by the Dow Jones industrial average, has increased sevenfold since 1989; and human capital, in the form of training and education, which is highly correlated with household wealth. Seven out of 10 Americans in the wealthiest 10 percent have at least a bachelor’s degree, according to the Federal Reserve, but only 1 out of 5 members of the least wealthy half of society does. Overall, much more could and should be done to give the poorer half of the American population a stake in the nation’s growth and prosperity.

Sharing the Wealth

There are federal policies ostensibly intended to achieve this objective, but they are far from optimally designed, as the post-1989 rise in wealth concentration suggests. Some programs, such as the mortgage interest deduction, IRAs and 401(k)s, 529 plans and Coverdell education savings accounts, take the form of tax deferrals or deductions, which are of no value to the 44 percent of households with insufficient earnings to owe federal income tax, as of 2018, — and of greatest value to those with earnings high enough to benefit from itemizing deductions. Before the 2017 tax legislation, the latter group amounted to about 30 percent of taxpayers; due to various features of the law, it might have been as low as 13.7 percent in 2019, according to the Tax Foundation.

Meanwhile, student loans, Fannie Mae and Freddie Mac and federal home mortgage insurance sought to enable people to borrow their way toward greater wealth. There was a certain logic to this: In postwar America, college had led to higher earnings, home prices had trended upward, eventual debt repayment was not a problem — and millions came out ahead, often helped by federally subsidized credit. That strategy has proved far riskier during the volatile economy since the Great Recession, when many ended up impoverished because they owed more than the market value of their houses or because they owed tens of thousands of dollars for unfinished degrees or completed ones that conferred few marketable skills.

A more efficient and equitable strategy would promote homeownership, retirement savings and higher education through tax credits instead of deductions and direct cash support instead of subsidized loans. All such assistance should be targeted to those of modest existing wealth.

The mortgage interest deduction already shrank in the 2017 tax bill — one of that measure’s few victories for equity. It could be eliminated, with its $25 billion annual cost devoted instead to a $15,000 credit (like the one proposed by President Biden) that first-time buyers could use for down payments on their homes. On retirement savings, the middle class’s access point to stocks and bonds, Mr. Biden has a roughly revenue-neutral proposal to replace the tax-deductibility of IRA and 401(k) contributions, which currently costs the government more than $200 billion per year, with a direct credit of $26 for every $100 a worker sets aside, up to a certain limit. Economists Kevin Hassett and Teresa Ghilarducci propose offering workers earning less than the median income a tax-deferred retirement plan similar to the Thrift Savings Plan federal employees now use, with government matching employee contributions. By contributing 5 percent of their wages, matched dollar for dollar, those in the bottom 25 percent of the income scale could accumulate median wealth of more than $43,000 within 10 years, according to Mr. Hassett and Ms. Ghilarducci. Estimated annual cost: up to $100 billion.

Higher education might be the thorniest issue, politically and economically, given the nearly $1.6 trillion in student debt that weighs on the net worth of millions — and the U.S. economy as a whole. Suffice it to say that wholesale debt forgiveness, the preferred solution of many on the progressive left, would indeed benefit many borrowers of modest means. But it would unjustifiably benefit many, including borrowers who come from relatively well-off families — or took out loans for law or business school — and are capable of servicing their debt out of the additional earnings higher education enables.

It would be more equitable, on balance, to encourage income-based repayment plans, which link debt service to post-graduation earnings. For the future, the government should emphasize direct, means-tested subsidies such as Pell grants, and reduce the role of loans — especially loans for graduate education, which are currently allowed without limit and make up an increasing share of the total student debt. The federal government should use its bargaining power as a leading underwriter of tuition to leverage cost control by colleges and universities.

The U.S. government has wasted time and money on its poorly targeted suite of policies to promote homeownership, retirement savings and higher education. Direct, transparent support, focused on those who really need the help, could more efficiently lift millions into the middle class.