AS SOCIAL POLICY, the most important change promised in President Reagan's tax reform bill is the relief that it would bring to very poor people who work. The House Ways and Means Committee has slightly changed and improved the president's proposal but essentially is following his lead. Fairness is the crucial test of any tax and -- if and when this bill is passed -- these repairs will make the federal tax system a great deal fairer.
It's a good principle that the country should not impose income taxes on those whom it regards as poor. The definition of poverty in use for the past two decades says that a family of four is poor if it has an income this year of $11,000. But that family, in the absence of any unusual deductions, would pay nearly $400 in income taxes. Since it would also pay almost $800 in Social Security payroll taxes, over a tenth of its exceedingly modest earnings would go into the U.S. Treasury. And that's not fair.
It hasn't always been that way. In the late 1970s Congress kept the threshhold for income taxation consistently above the poverty line, sometimes by a comfortable margin. But since then inflation has badly eroded the protections for the people at the bottom end of the income ladder. Congress raised the personal exemption to $1,000 in 1978. It would have to go to $1,660 this year to return it to its real value of seven years ago. Similarly, if it were fully adjusted for inflation, the 1978 standard deduction or zero bracket amount of $3,400 for a couple would be $5,600 this year. It's not outlandish for Mr. Reagan to propose a standard deduction of $4,000 for a couple and a personal exemption of $2,000. The Ways and Means Committee prefers a standard deduction of $5,950 and a personal exemption of $1,500, which, for a family of four, comes to much the same thing. Either would bring these basic protections back almost, but not quite, to the dimensions of 1978 -- which, by the way, were just about the same as they had been, adjusted for inflation, in 1950.
And then there's the earned income credit, a special provision that Congress introduced in 1975 to help offset the rising weight on the working poor of the Social Security payroll tax. Despite minor increases over the years, inflation has reduced its real value about a third. Meanwhile, the Social Security tax has continued to rise. Both the president's bill and the Ways and Means Committee's version would expand the earned income credit -- the committee is a little more generous -- and index it to increase with future inflation just as the personal exemption and the standard deduction will now be indexed.
Life has grown harder for poor people in this country since the beginning of the 1980s. For the poorest one-fifth of the population real incomes are lower than in 1980, mainly because of the 1981-82 recession from which they have been the last to recover. At the same time budget cutting has reduced public benefits to these same people. On top of that, the president and Congress -- until this year -- have allowed inflation to keep raising their taxes.
It's not a technical financial issue but a matter of public morality. Both tradition and principle argue that it's urgent to lighten the load for the poorest of taxpayers. But the tax reform legislation is slowing down in Congress, and there seems to be a rising inclination to let it go to next year. The need to bring help to the least well paid of wage earners and taxpayers before another year passes is a compelling reason to finish the job this autumn.