We have discovered that the welfare system discourages recipients from working because the more income they earn, the less welfare benefits they receive. How does the earned income tax credit attempt to loosen the poverty trap?
The earned income tax credit helps to retain more amount of money by the workers by reducing the tax amount that the worker owes and may also offer a refund.
A poverty trap occurs when a poor individual is unable to escape poverty. Even if he gets a job, a poor individual will remain poor since his government benefits would be reduced.
Bad educational institutions, corrupt government, a lack of public health care, war, and poor infrastructure are all factors that contribute to the establishment of a poverty trap.
Individuals in poverty must be offered assistance in order to obtain the capital required to escape poverty. If they do not get out of poverty, they will continue to rely on handouts. One of the largest aid programs for low-income people is the Earned Income Tax Credit (EITC).
A tax credit enables you to keep more of your money in your pocket. It lowers one's tax liability and, in some cases, provides a refund. Workers are given credit based on a proportion of their earnings up to a credit limit (maximum), offering significant assistance to low- and moderate-income groups. Depending on the size of the family, the maximum credit limit and interest rate will differ. A low-income family is eligible for a tax break that grows in proportion to the number of hours they work. Families who work more are awarded extra credit.
Encouraging people to work helps to ease the poverty trap. The earned income tax credit gradually decreases as a family's income rises beyond the poverty line. Because individuals can receive the same amount of government benefits if they choose not to work, the EITC acts as a disincentive to work for near-poor families. The EITC, on the other hand, contributes to a significant reduction in poverty.
The earned income tax credit allows workers to keep more money by decreasing the amount of tax they owe and maybe providing a refund.
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