You are right rip it out and scrape back the plaster level with the sheets and then use paper tape to tape the join.
If you try to fill out either side you will just end up with an unsightly join. the easy tape is not easy to cover when it bubbles down like that.
<b>Never ever use easy tape on butt joins or ceiling joins, it is prone to cracking.</b>
For anyone reading this to prevent tape from acting this way pre fill any gaps and scrape back level with the sheet prior to taping and you won't have this problem.
For information on taping with paper tape go to this link it should help you.
http://www.plasterbrokers.com/tapejoin.html
Cheers Rod