Final answer:
The poverty trap is mitigated by the gradual phase-out of the Earned Income Tax Credit, which does not penalize low-income families for earning more up to a certain point. The recent expansion of the Child Tax Credit under the American Rescue Plan further supports working families by providing a larger, monthly credit to help manage living expenses and reduce poverty.
Step-by-step explanation:
The discussion about the poverty trap concerns the unintended consequence where each additional dollar earned by an individual can lead to a nearly equivalent reduction in government support payments, negating any financial benefit from working more. To combat this, programs like the Earned Income Tax Credit (EITC) are phased out gradually. The EITC provides a larger credit up to a certain income threshold, after which the credit diminishes at a fixed rate. In the context provided by the Tax Policy Center for a single-parent family with two children in 2013, earnings can increase from $13,430 to $17,530 without a reduction to the EITC, thereby avoiding the poverty trap in that income range.
Moreover, with the introduction of President Joe Biden's American Rescue Plan in 2021, the Child Tax Credit (CTC) was expanded, offering a higher credit amount and now disbursed monthly to better support families and reduce child poverty. Such policy changes aim to lessen the burden of financial instability and support participation in the labor market.