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What is the impact of reducing financial incentives of the AWP, a program that allows individuals on Disability Insurance (DI) to combine salary and benefits? Does this encourage employment resumption, or conversely, does it push individuals back into full benefit dependency? Using a rich set of administrative data, our study leverages a kink in the AWP's design and applies RKD to infer the causal impact of a 30% increase in marginal taxation rates on labor supply. Our findings reveal that, after crossing the kink, the probability of DI recipients to exit the AWP increases in 5.9%. Further analysis of exit paths indicates a 3% increase in the probability of returning to full DI and a 1.3% impact on the probability of full work resumption. We also show that men are more sensitive to taxation than women, and that women are more inclined to return to full DI. Individuals with mental health conditions tend to opt for full DI after the tax increase, while those with musculoskeletal conditions are more likely to return to full-time employment. Blue-collar workers and individuals on long-term DI exhibit a greater responsiveness to taxation changes. These findings hold significant relevance for the design of return-to-work policies for DI recipients, shaping a path toward more effective and inclusive strategies.
