Pouncing on the Working Poor : Budget: The GOP's plan to cut a tax relief program is the wrong policy at the wrong time punishing the wrong people.

Robert J. Samuelson writes about economic issues from Washington.

The Republicans have a split personality. At times, they are principled and bold, striving to make government live within its means even at the risk of being unpopular. But at other times, they are simply mean and petty, rewarding friends and punishing anyone else. A case in point is the plan to reduce the Earned Income Tax Credit (EITC), a measure that provides tax relief for the working poor and, until now, had enjoyed wide bipartisan support.

The EITC makes sense. It mainly allows low-income workers to keep more of what they earn. Through income-tax refunds, it returns Social Security payroll taxes (now 15.3% of wages) and offsets excise and sales taxes. It rewards work and discourages welfare. In 1996, the program would cost the government about $25 billion. Two-thirds of the benefits would go to those with incomes under $20,000, and most of the rest would go to those with incomes under $25,000. To raise taxes on these workers is genuinely hard-hearted. The Republicans are right to reexamine welfare and Medicaid. But the tax credit program ought to be wildly popular with conservatives. It cuts taxes. It promotes self-sufficiency and self-respect. It doesn't dictate to beneficiaries how to spend their money. Politically, it substitutes for misguided increases in the minimum wage.

The Republicans wouldn't kill the program outright. They would merely make it more stingy. Created in 1975, the EITC was expanded significantly in 1986, 1990 and 1993. The Republicans can cite "policy" reasons for reversing some of this liberalization, but the real reasons are political. First, poor workers aren't Republicans, and the proposed changes are technical and obscure.

Second, Republicans are desperate to find revenues to balance the budget and provide $245 billion in tax cuts over seven years. The House Ways and Means Committee would cut the tax credit program $23 billion over seven years; the Senate Finance cuts exceed $40 billion. In effect, Republicans are raising taxes for poorer workers so that taxes for higher-income workers can be lowered. Perhaps this is good politics; it is lousy social policy.

True, the program isn't perfect. One complaint is that it has spawned widespread fraud. But the worst abuses have been curbed, argues Robert Greenstein, head of the Center on Budget and Policy Priorities, an advocacy group. One sign that the anti-fraud measures are working is that the Congressional Budget Office recently reduced its estimate of the program's cost. Another problem is one that affects many programs for the poor. It involves a question: How fast, as peoples' incomes rise, should benefits be reduced? If the EITC is abruptly ended at a given income level, then recipients are discouraged from earning more money. Most extra earnings are offset by a loss of the tax credit. The solution has been to reduce the tax credit gradually. No more than 21 cents of each extra dollar of earnings is lost from a lower EITC. But the phaseout means that, in small amounts, the program benefits workers with incomes up to $28,553 in 1996. Absurd, say Republicans. That's well above any definition of poverty. So, the Republicans would phase out the program faster. With other changes, the Senate Finance Committee plan would increase taxes an average of $372 in 1996 for 7.4 million two-child families, estimates the Clinton Administration. By 2005, a fifth of families eligible under present law would lose the tax credit.

The Republicans act as if supply-side economics is OK for the wealthy but not for the near poor. The Republicans are simply wrong when they say that most of these workers are being subsidized by the EITC. At the very lowest levels, this is true. But the effect disappears at $12,000 to $15,000 of income and, beyond that, the tax credit merely reduces the tax burden. Work is still the best anti-poverty program. Of workers with full-time, year-round jobs, less than 3% have incomes below the poverty line. In some ways, the EITC is too narrow even now. It barely applies to workers without children, and the Republicans would eliminate this part of the credit altogether.

Naturally, the Republicans deny they're being cruel. In practice, they say, their proposed family income credit of $500 per child would offset any loss from a stingier EITC. However, it's not yet clear whether the credit will actually be enacted and if it is, Republicans shouldn't--relatively speaking--discriminate against low-income families by withdrawing an existing tax benefit.

Trimming EITC now is the wrong tax increase on the wrong people at the wrong time. Beyond being bad policy, it also strips the Republicans of valuable moral authority--the public perception that they're being "fair" in overhauling government. Once that's gone, Republicans will find it harder to make needed, but unpopular, changes. They are at war with themselves and, all too often, their worst impulses prevail.

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