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Question: Peters earnings are taxed at a rate of 15 percent by the personal income tax and at a combined rate of 7.45 percent by the Social Security and Medicare payroll taxes. Suppose that if Peter becomes unemployed, unemployment insurance replaces 50 percent of his before-tax earnings. Recall that UI is subject to the income but not the payroll tax. What percent of Peters after tax income is replaced by UI? What are the implications for the effects of UI on unemployment?

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