Discussion paper
DP19890 Taxes Today, Benefits Tomorrow
This paper tests whether partially unemployed workers value future preserved benefits when they bunch at the kink of the unemployment insurance benefit-withdrawal schedule. I extend the bunching formula of Saez (2010) to a dynamic setting that accounts for the value of future benefits tied to taxation. This yields new tests of tax-benefit linkage based on bunching heterogeneity. I verify in quasi-experiments that U.S. UI extension programs that decrease the value of future benefits lead to more bunching and to lower labor supply. Last, a quantification exercise of the dynamic bunching formula provides extra support for a strong tax-benefit linkage.
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