Final answer:
The kiddie tax does not apply to a child with net unearned income of $2,200 or less. The Earned Income Tax Credit (EITC) aims to avoid the poverty trap by having a gradual phase-out process to encourage work without penalizing additional earnings.
Step-by-step explanation:
The kiddie tax is a tax rule that is applied to the unearned income of children to prevent parents from avoiding taxes by transferring large sums of investment assets to their minor children. According to current U.S. tax law, the kiddie tax will NOT apply to a child whose net unearned income is equal to or less than $2,200. This threshold is designed to allow some income for minors to not be taxed at their parents' potentially higher tax rate.
To address economic inequality and reduce the chances of a poverty trap, the government offers programs like the Earned Income Tax Credit (EITC). The EITC is structured to phase out gradually to prevent a sudden decline in benefits as income increases. It incentivizes work by providing a maximum credit which then decreases at a certain point, as to not discourage additional earnings.
The issue of the poverty trap is crucial when designing welfare programs. The gradual phase-out of the EITC is an example of a system intended to both provide support and encourage work without imposing a harsh penalty on additional earnings that could lead to disincentives to work.