Optimal tax progressivity boosts welfare by reducing unemployment and increasing productivity.
Increased income tax progressivity can reduce unemployment but also lower work effort and productivity. There might be an optimal level of tax progressivity where the benefits of reduced unemployment balance out the drawbacks of lower productivity. Four models of imperfect labor markets were used to find this optimal level, showing that a high degree of tax progressivity could maximize the welfare of wage earners. The results depend on factors like unemployment benefits and how work effort changes with after-tax wages.