Extensions to the Wealth Tax Neutrality Framework

TL;DR

This paper extends the wealth tax neutrality framework, analyzing its robustness under various preferences and market conditions, and explores how implementation details influence economic behavior and policy outcomes.

Contribution

It broadens the neutrality frontier to include stochastic volatility and recursive utility, and identifies real-world factors causing deviations from theoretical neutrality.

Findings

Portfolio neutrality holds under stochastic volatility and Epstein-Zin utility.

Non-homothetic preferences like HARA break neutrality.

Implementation details such as thresholds and asset assessment cause deviations.

Abstract

Fr{\o}seth (2026; arXiv:2603.05264) shows that a proportional wealth tax on market values is neutral with respect to portfolio choice, Sharpe ratios, and equilibrium prices under CRRA preferences and geometric Brownian motion. This paper investigates the robustness of that result along two dimensions. First, we extend the neutrality frontier: portfolio neutrality -- including all intertemporal hedging demands -- is preserved under stochastic volatility (Heston and general Markov diffusions) and Epstein-Zin recursive utility, but breaks under non-homothetic preferences such as HARA. Second, we identify four channels through which implemented wealth taxes depart from neutrality even under CRRA: non-uniform assessment across asset classes, general equilibrium price effects in inelastic markets, progressive threshold structures, and endogenous labour supply. Each channel is formalised and, where possible, calibrated to the Norwegian wealth tax system. The progressive threshold introduces a tax shield that increases risk-taking near the exemption boundary -- an effect opposite in sign to the HARA distortion -- and, at the extreme, generates a participation margin at which investors exit the tax jurisdiction entirely. We formalise this tax-induced migration as the extreme response at the progressive threshold and examine the Norwegian post-2022 experience as a case study. The full framework is applied to evaluate the Saez-Zucman proposal for a global minimum wealth tax on billionaires and the related French proposal for a national minimum tax above EUR 100 million.