The aim of this project is to analyse reforms of the German income tax system, using an optimal taxation approach. Furthermore, we account for possible interaction effects due to the non-competitiveness of the labour markets. We adapt the ZEW micro/macro model to evaluate the optimal tax progression, endogenizing the labour supply and collective wage negotiation. The innovations of this project lie in (i) the modelisation of the labour supply, accounting for involuntary unemployment, (ii) the integration of an optimal taxation design into the micro/macro model, and (iii) the implementation of a welfare module to compare different concepts of taxation.