Unemployment benefits are subject to income taxes. They are not (by default) subject to withholding, or to payroll taxes. Suppose that a particular worker is subject to a payroll tax of 7.65% of her wages; that she pays an average income tax rate of 10%; and that after losing her job, she is eligible to receive 60% of her previous weekly income.
a. What fraction of her take-home paycheck will she receive from unemployment insurance?
b. What effect does the tax treatment of unemployment insurance benefits have on the ability it provides its recipients for smoothing?