Key Terms

Key Terms

earned income tax credit (EITC) a method of assisting the working poor through the tax system effective income tax percentage of total taxes paid divided by total income estate tax a tax imposed on the value of an inheritance income a flow of money received, often measured on a monthly or an annual basis income inequality when one group receives a disproportionate share of total income or wealth than others Lorenz curve a graph that compares the cumulative income actually received to a perfectly equal distribution of income; it shows the share of population on the horizontal axis and the cumulative percentage of total income received on the vertical axis Medicaid a federal–state joint program enacted in 1965 that provides medical insurance for certain (not all) people with a low-income, including those near the poverty line as well as those below the poverty line, and focusing on low-income families with children, the low-income elderly, and people with disabilities poverty the situation of being below a certain level of income one needs for a basic standard of living poverty line the specific amount of income one requires for a basic standard of living poverty rate percentage of the population living below the poverty line poverty trap antipoverty programs set up so that government benefits decline substantially as people earn more income—as a result, working provides little financial gain progressive tax system a tax system in which the rich pay a higher percentage of their income in taxes, rather than a higher absolute amount quintile dividing a group into fifths, a method economists often use to look at distribution of income redistribution taking income from those with higher incomes and providing income to those with lower incomes safety net the group of government programs that provide assistance to people at or near the poverty line Supplemental Nutrition Assistance Program (SNAP) a federally funded program, started in 1964, in which each month poor people receive SNAP cards they can use to buy food wealth the sum of the value of all assets, including money in bank accounts, financial investments, a pension fund, and the value of a home

Key Concepts and Summary

15.1 Drawing the Poverty Line

Wages are influenced by Supply and demand in labor markets influence wages. This can lead to very low incomes for some people and very high incomes for others. Poverty and income inequality are not the same thing. Poverty applies to the condition of people who cannot afford the necessities of life. Income inequality refers to the disparity between those with higher and lower incomes. The poverty rate is what percentage of the population lives below the poverty line, which the amount of income that it takes to purchase the necessities of life determines. Choosing a poverty line will always be somewhat controversial.

15.2 The Poverty Trap

A poverty trap occurs when government-support payments decline as the recipients earn more income. As a result, the recipients do not end up with much more income when they work, because the loss of government support largely or completely offsets any income that one earns by working. Phasing out government benefits more slowly, as well as imposing requirements for work as a condition of receiving benefits and a time limit on benefits can reduce the harshness of the poverty trap.

15.3 The Safety Net

We call the group of government programs that address poverty the safety net. In the United States, prominent safety net programs include Temporary Assistance to Needy Families (TANF), the Supplemental Nutrition Assistance Program (SNAP), the earned income tax credit (EITC), Medicaid, and the Special Supplemental Food Program for Women, Infants, and Children (WIC).