Democratic presidential candidate Bill Bradley last week added his proposal to reduce child poverty to his earlier and bolder proposal to help the nation's 44 million uninsured gain access to affordable health-care coverage. Both plans relied heavily on a funding concept -- tax credits -- that may be the most politically viable way to help low-wage workers afford necessities such as health care, child care and retirement security.

Critics already are complaining that projected federal budget surpluses are not certain enough to pay the $75 billion annual cost of Bradley's modest measures. "We have more will than wallet," was former President George Bush's lament. But if Americans are serious about sharing prosperity, a portion of the hundreds of billions of dollars currently spent on tax breaks that subsidize health care, child care, housing and pension saving for the better off could be redesigned to help those left behind.

The starting point for any anti-poverty agenda is rewarding work with a "living wage." A full-time, year-round worker grosses about $10,000 annually at today's minimum wage, not nearly enough to support a family. Yet a too-large increase in the minimum wage could result in fewer jobs for young and low-skill workers.

Start by expanding the Earned Income Tax Credit

As an alternative, Bradley's plan calls for a large increase in the Earned Income Tax Credit (EITC) targeted at working poor families with children. The EITC was originally a Republican idea, enacted during the Ford administration and later championed by President Ronald Reagan. Last year, the credit lifted more than 4 million Americans above the poverty line, half of them children.

The EITC's bipartisan appeal is that it makes low-income work more rewarding than welfare. Unlike a tax deduction, a credit reduces a worker's tax bill dollar-for-dollar. Because it is "refundable," the EITC benefits workers who earn too little to pay income tax. It offsets the 15.2% Social Security and Medicare payroll tax, which is levied on every dollar of wages up to $72,000. As a substitute for a higher minimum wage, it encourages employers to hire low-skill and entry-level workers.

Unfortunately, even a more-generous EITC cannot compensate for the steady erosion in basic health and pension benefits. A recent survey by the Commonwealth Fund found that access to employer-paid health insurance is highly correlated with income. More than 40% of workers who earn less than $20,000 lack health insurance, while just 7% of workers earning over $35,000 are uninsured.

Private pension coverage is even more skewed to higher-income workers. Fewer than 50% of the nation's workers receive a pension benefit at work. While Social Security provides a safety net, the average benefit is frozen at an inflation-adjusted $800 per month -- an amount that will feel more and more like poverty as overall affluence increases.

Many voters probably assume these inequities are simply the result of market forces. In fact, because the value of employer-paid benefits are excluded from income and payroll taxes, workers with benefits receive an enormous tax subsidy.

Tax deductions are biased to the affluent

The U.S. Treasury, as part of the federal budget, estimates that deductions this year for pension saving, health insurance and home-mortgage interest will cost taxpayers a total of $220 billion in lost income-tax revenue alone. Tax deductions for employer-paid health care ($76 billion), retirement saving ($90 billion) and mortgage interest ($54 billion) are the three largest tax expenditures in the federal budget.

Tax deductions are worth much more to higher-income taxpayers. For example, the Treasury Department estimated earlier this year that 66% of the tax benefits for pension and retirement savings go to the 5% of households with taxable incomes above $100,000.

The reason is that a deduction -- which reduces income subject to taxation -- is equivalent to a 40% tax credit for someone in the top (39.6%) tax bracket. A lower-middle income worker in the 15% tax bracket gets a break only one-third as large. State income taxes are typically reduced by a similar proportion.

Tax subsidies for child care are a good example. Any worker can use the child-care credit to reduce his or her tax bill up to $500. But workers whose employer sets up a dependent care benefit can deduct up to $5,000 from taxable income, which is worth $1,500 to a middle-income earner in the 28% bracket and $2,000 to a top-bracket earner.

Many high-bracket taxpayers not only benefit disproportionately; they game the system. For instance, Bill Gale, an economist at the Brookings Institution, has found that a large number of affluent people increase tax-deductible home mortgage debt to finance investments in tax-deferred retirement accounts. This sort of "tax arbitrage"creates economic distortions and wasted tax revenue.

Competing Approaches to Health and Pension Coverage

A tax deduction therefore is not a very effective way to make health insurance, child care, a starter home, or retirement saving more affordable for very low-income people. Yet conservatives in Congress are trying to expand tax deductions precisely where credits are overdue.

For example, the GOP's "Quality Care for the Uninsured Act" (H.R. 2990), would allow any worker to fully deduct the cost of health care or long-term care insurance premiums. While it makes sense to extend equal tax breaks to the self-employed, a deduction will not help most uninsured families. More than 90% of the uninsured either pay no income tax or are in the 15% tax bracket. Because the typical family policy costs $6,000 a year, a 15% discount makes little difference.

Both Bill Bradley and an unlikely pairing of House members -- GOP Majority Leader Dick Armey (TX) and liberal Rep. Jim McDermott (D-WA) -- have proposed using tax credits instead. They would allow workers to subtract a share of premium paid from taxes owed, or to get a refund if no income tax is due. Bradley's sliding-scale tax credit is even better, because he would allow the uninsured to choose among lower-priced insurance options available to federal workers, which further reduces the after-tax cost to consumers.

Competing pension proposals suggest a similar tension. Conservatives have proposed doubling the limits on tax-deductible contributions to 401(k) and other pension plans. A better approach, proposed by President Clinton, calls for depositing tax credits into Universal Savings Accounts for lower-income workers who lack a deductible pension at work, along with additional matching amounts for voluntary contributions.

Since the new bipartisan policy consensus puts work at the center of social policy, it's only fair that citizens who "work hard and play by the rules" should be able to support themselves and their families. One affordable and relatively efficient option is to reform the tax system so that "middle-class tax breaks" are available to the working poor.

Michael Calabrese directs the Public Asset Program at the New America Foundation, a non-partisan policy institute in Washington, D.C. His e-mail address is calabrese@newamerica.net.