Final answer:
The earned income tax credit helps to mitigate the poverty trap by phasing out benefits slowly instead of abruptly, thus encouraging continued work. For a single-parent family with two children, the Tax Policy Center indicated that the EITC would decrease incrementally at a rate of 21.06 cents for each dollar of income over $17,530 until an income of $46,227 is reached.
Step-by-step explanation:
The concern regarding the poverty trap highlights how additional income can lead to nearly equivalent reductions in government support payments, such as the earned income tax credit (EITC). To address this, the EITC is structured to phase out gradually. This phase-out is intended to maintain a financial incentive to earn more without losing substantial benefits. A specified range of income allows individuals to retain the full credit before it begins to decrease. For instance, a single-parent family with two children had a phase-out range defined in 2013 by the Tax Policy Center. The earned income tax credit began to decrease at a rate of 21.06 cents for each dollar earned over $17,530, until completely phased out at $46,227.
In practice, this means that rather than facing a dollar-for-dollar reduction in benefits, which is often the concern raised by the poverty trap situation, individuals receiving the EITC will have a reduction of roughly 21% in benefits per additional dollar earned once they exceed the initial income threshold. However, the phase-out range itself can inadvertently create a high marginal tax rate effect, which could disincentivize working beyond a certain income level for some. Nevertheless, research shows that the EITC generally promotes labor supply, particularly among single mothers.