poverty trap

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A situation in which an increase in the income of a low-earning household causes either a loss of state benefits or an increase in taxation that is equal to or greater than the increase in earnings, i.e. the household faces a marginal tax rate of 100% (in some instances the marginal tax rate can exceed 100%). The poverty trap creates a disincentive to earning and is often demoralizing for those caught in it. Most tax and benefit systems create poverty traps and policies for removing them are difficult to find.

Subjects: Financial Institutions and Services.

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