Final answer:
The Earned Income Tax Credit helps alleviate the poverty trap by increasing the disposable income of low- to moderate-income workers. It diverges from traditional welfare by providing a financial incentive for individuals to work rather than dissuading them with reduced benefits.
Step-by-step explanation:
The Earned Income Tax Credit (EIC) is a federal tax credit designed to help low- to moderate-income workers and encourage them to work. A disability pension qualifies as earned income only if it is received before the retirement age minimum. However, generally, pensions are not considered earned income.
The EIC works to loosen the poverty trap by providing a subsidy that increases with each dollar earned up to a certain point. This provides a financial incentive for individuals to work, as their overall income will increase even as they earn more, unlike with traditional welfare benefits that decrease with higher earnings.
Therefore, the EIC helps alleviate the issue where the welfare system may discourage recipients from working by ensuring that working leads to higher disposable income.