The share of an additional unit of earnings lost to taxes and to the withdrawal of means-tested benefits.
In more detail
For low-income households the effective rate often exceeds the headline income-tax rate because benefits are reduced as earnings rise. When withdrawal is close to 100%, extra work brings almost no gain, a so-called poverty trap. A negative income tax sets an explicit withdrawal rate, for example 50%, to keep incentives to work. The trade-off is that a lower withdrawal rate extends payments further up the income scale and raises the cost of the scheme.