Final answer:
The kiddie tax is a tax rule for the unearned income of children and does not apply if that income is below a certain threshold. The Earned Income Tax Credit (EITC) mitigates the poverty trap by phasing out benefits gradually, which incentivizes work without abruptly cutting off support as earnings rise.
Step-by-step explanation:
The kiddie tax is a tax rule that applies to the unearned income of children. The kiddie tax does not apply if a child's net unearned income is equal to or less than a certain threshold which is adjusted annually for inflation. The kiddie tax is meant to prevent parents from avoiding taxes by shifting their investment income to their children, who are typically in a lower tax bracket.
Regarding the risk of a poverty trap where government support is reduced as a person earns more, the Earned Income Tax Credit (EITC) is designed to mitigate this by phasing out benefits slowly. The EITC provides a tax credit which increases with earned income to a certain point, remains steady over a range of income, and then phases out at higher income levels. This helps encourage work while still providing support.
As illustrated by the Tax Policy Center, for a single-parent family with two children, once their earnings exceed a certain level (for example, $17,530 in 2013), the credit is reduced gradually, by 21.06 cents for every dollar earned, rather than losing a full dollar of government support for every dollar earned, which would disincentivize work.