Final answer:
The tax provision known as the 'Kiddie Tax' prevents parents from shifting unearned income to their children to lower the overall tax liability. The Earned Income Tax Credit (EITC), a notable anti-poverty program, incentivizes work and avoids a poverty trap by phasing out benefits gradually with rising income, avoiding a steep decline in government support as individuals earn more.
Step-by-step explanation:
The tax provision that reduces parents' ability to shift unearned income to children is called the Kiddie Tax. This rule helps prevent income shifting from parents to children, who are typically in a lower tax bracket, thereby reducing the family's overall tax liability. It effectively taxes a child's unearned income (such as interest, dividends, and capital gains) above a certain threshold at the parents' higher tax rates rather than the child's lower rates.
Regarding the belief that cutting taxes for the rich results in economic benefits for the poor, this is commonly referred to as trickle-down economics. However, the Earned Income Tax Credit (EITC) is designed to support low- to moderate-income working individuals and families, particularly those with children. Caroline Krafft describes the EITC as one of the key anti-poverty programs in the U.S. that incentivizes work by providing a phased tax credit based on income and family size. The credit increases with income up to a maximum point before phasing out.
For example, the EITC helps mitigate the potential poverty trap by reducing benefits gradually as income rises. According to the Tax Policy Center, for a single-parent family with two children, the credit neither decreases nor increases within a certain income range. After this range, the credit is reduced gradually, ensuring that additional earnings do not result in equivalent reductions in government support, hence encouraging continuous employment and income stability.
Such measures trace back to crucial shifts in tax policy, like the Revenue Act of 1942, which lowered the minimum income requirement for federal tax, changing the nature of taxation in the United States and paving the way for future tax-based social policies.