Final answer:
The earned income tax credit (EITC) helps to mitigate the poverty trap effect by phasing out slowly, allowing earners to benefit from their work without immediate and equal reductions in government support.
Step-by-step explanation:
The concern about a poverty trap arises when increased earnings lead to an almost equivalent reduction in government support payments, potentially discouraging work. The earned income tax credit (EITC) is designed to avoid this trap by phasing out benefits slowly as income increases. To illustrate, in 2013, for a single-parent family with two children, the EITC remains constant while earnings increase from $13,430 to $17,530, ensuring that each additional dollar earned during this range does not affect the credit. Beyond $17,530, for every dollar earned, the credit reduces by 21.06 cents, avoiding a steep decline in benefits and thus encouraging work rather than dissuading it.
The credit phases out entirely once income reaches $46,227, mitigating the risk of the poverty trap by allowing earned income to have a net positive effect on total income for a sustained period. The effect of this slow phase-out is reflected in different scenarios of working hours and the resultant household income. When an antipoverty program is in place, a mother not working at all would receive $18,000 in government support.