IN RECENT years the federal tax system has lost its progressive edge. For this and other reasons, the income distance between rich and poor has increased. The budget summit ought to reverse these trends; at least it should not exacerbate them.
The right way to raise additional revenue would be to increase the progressive income tax. Too many of the tax proposals being put forward are regressive instead. The administration's first priority continues to be a cut in the capital gains tax, which would artificially increase revenues in the short run though not in the long. Some 80 percent of its benefit would go to the top 2 or 3 percent of all taxpayers. If then some taxes also have to be increased, administration officials have made clear they would prefer excise taxes. These fall heaviest on the poor.
To help offset an excise increase and counter the symbolism of a capital gains cut, there has been much talk of increasing the earned-income tax credit. The EITC is a negative income tax or wage supplement for the working poor with children. It reduces their taxes, and if they are too poor to owe taxes, the Treasury sends them a check instead.
One weakness is that only about a fourth of the poor receive the EITC, so the Congressional Budget Office suggests enriching other benefits as well, perhaps food stamps. A more important problem is that an increase in the EITC has been contemplated for more than a year, not as a way of protecting the poor against a tax increase but as a way of improving their status. First the credit was going to be a supplement to the modest increase in the minimum wage, then a partial substitute for a new child care program for the poor. But now the administration and others are warning against making the child care bill too costly -- even as some in Congress want the child care money spent on other than the EITC. A Senate proposal would divert some of it to the better-off elderly by easing a Social Security earnings test.
The credit must also surmount an Internal Revenue Service survey suggesting that several years ago 40 percent who claimed it were ineligible. Defenders say that the error rate was exaggerated (IRS counted nonrespondents to the survey as ineligible); that it has already been dealt with (as part of a broader reform, taxpayers must now list the Social Security numbers of all dependents); and that the complicated error-causing definition of head of household will be simplified. The point is also made that most of those found technically ineligible were nonetheless part of the general population meant to be helped -- parents of dependent children, working at least part-time and poor. Still, the error rate is a hurdle to overcome.
But it ought not become an excuse. The budget summit resuming today will be at least as much about income distribution as about deficit reduction. It's crucial that the deficit come down, but equally crucial that this not happen at the wrong people's expense.