Practice mode Income Inequality

What does the poverty trap refer to?

Correct answer C. A situation in which those receiving state benefits may be almost no better off if they work more, because doing so reduces the benefit income they are entitled to and increases the tax they pay

Explanation

Extra earnings trigger both benefit withdrawal and higher tax and National Insurance. The combined effective marginal rate can be close to 100 percent, so low earners gain little by working more.

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