Final answer:
The earned income tax credit (EITC) is a measure designed to help the working poor by providing tax relief and avoiding the poverty trap, where increased earnings could lead to a reduction in government assistance. For a single parent with two children, the credit does not decrease with increased earnings up to an income level of $17,530, after which it's gradually reduced to avoid sudden loss of benefits.
Step-by-step explanation:
The earned income tax credit (EITC) is a powerful tool aimed at assisting low-income individuals and families, particularly those in the working poor category, to reduce their tax liability and in many cases, receive a tax refund.
The purpose of EITC is to offset the social issue known as the 'poverty trap,' where the increase in income leads to a proportional reduction in government assistance, essentially penalizing individuals for earning more.
As an example, in 2013, a single-parent family with two children could receive a full credit of $5,372 until they reached $17,530 in income.
Beyond that, as income increases, the EITC begins to phase out. The phase-out is gradual to avoid a steep decrease in benefits; therefore, above $17,530 of income, for every additional dollar earned, the credit is reduced by 21.06 cents, until the income reaches $46,227, at which point the EITC phases out entirely.
The gradual phase-out helps to mitigate the disincentive to work that can come with higher earnings resulting in the loss of benefits.