Progressive taxation as an automatic stabilizer under nominal wage rigidity and preference shocks

Previous research has shown that in the context of a prototypical New Keynesian model, more progressive income taxation may lead to higher volatility of hours worked and total output in response to a monetary disturbance. We analytically show that this business-cycle destabilization result is overturned within an otherwise identical macroeconomy subject to impulses to the household's utility formulation. Under a continuously or linearly progressive fiscal policy rule with the symmetric-equilibrium tax burden unchanged, an increase in the positive level of tax progressivity will always raise the degree of equilibrium nominal-wage rigidity, and thus serve as an automatic stabilizer that mitigates cyclical fluctuations driven by preference shocks.