Question

Layla earns wages of $29,500 per year. She qualifies for about $7,500 in housing credits, which raises her overall income to $37,000. Housing credits are withdrawn for anyone earning more than $30,000 per year.

a. If Layla earns an extra $2,000 per year, her overall income would (Click to select) increase decrease by $_______

Answer 1

Layla's overall income would decrease because she would lose housing credits by exceeding the income threshold. The poverty trap refers to the reduction of benefits as earnings increase. The earned income tax credit phases out slowly to mitigate this problem.

Step-by-step explanation:

If Layla earns an extra $2,000 per year, her overall income would decrease, because she would lose her housing credits which amount to $7,500. By earning $31,500 ($29,500 + $2,000), she surpasses the $30,000 threshold for housing credits. Without these credits, her income would be solely from her wages, resulting in a decrease in total income.

The concept of benefits being phased out as income increases is referred to as the poverty trap. This is when increased earnings result in a loss or reduction of government support that is almost equivalent to the extra income earned, thus providing little incentive for additional work. To address this, certain programs, like the earned income tax credit, are structured such that benefits decrease gradually instead of all at once, thereby lessening the impact of the poverty trap.