Academic journal article
By Larose, Peter
Social Policy Journal of New Zealand
In his paper on poverty traps, Bruce Bradbury discussed the difficulties of trying to alleviate unemployment by manipulating the tax/transfer system. Although he offered no firm conclusions, he clearly indicated that policy analysts should be wary of looking for solutions to the failures of the labour market in the tax/transfer system.
Poverty traps occur when an increase in private income leads to a reduction in disposable income. They are generally measured by "Effective Marginal Tax Rates" (EMTRs), which show the loss of income (through taxation and benefit reduction) that occurs for every dollar of additional private income. For people receiving substantial income support payments the "poverty trap" can be particularly severe. Historically this was justified on the grounds that high EMTRs were confined to income regions where there were few people. However, with increased diversity in labour markets (less standard working, more part-time) this assumption is less tenable. In fact, in many cases high EMTRs now extend into income levels where people are working for low wages.
Bradbury suggests that these might better be called "low-wage traps". John Jensen has suggested the term "dependency traps". In Australia (and other countries) policy reforms have attempted to decrease the severity of these "traps". But the reality is that they have simply "re-arranged" the problem. With the introduction of programmes such as Family Allowance (Australia) and Earned Income Tax Credit (USA), EMTRs are lowered for those with very low income, but raised for those with low-medium income. (When the Government provides people with income-tested benefits, eventually they have to abate away. …