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  5. Taxes Today, Benefits Tomorrow

American Economic Journal:
Applied Economics

ISSN 1945-7782 (Print) | ISSN 1945-7790 (Online)

Taxes Today, Benefits Tomorrow

  • Thomas Le Barbanchon
American Economic Journal: Applied Economics (Forthcoming)

Abstract

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 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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