Heterogeneous Returns and Wealth Tax Neutrality: A Fokker-Planck Framework

TL;DR

This paper extends the Fokker-Planck model to heterogeneous investors with persistent return differences, analyzing how wealth taxes impact wealth distribution, asset prices, and portfolio choices across ability types.

Contribution

It introduces a joint Fokker-Planck framework for heterogeneous returns, revealing how wealth taxes affect distribution and economic outcomes.

Findings

Wealth tax neutrality depends on ability-specific return dynamics.

Stationary wealth distribution shape changes with heterogeneity.

Asset prices and portfolios are influenced by ability-dependent wealth dynamics.

Abstract

We extend the Fokker-Planck framework of Froseth (2026, arXiv:2603.05283) to populations of investors with heterogeneous, persistent return-generating ability. When the drift coefficient in the Langevin equation for log-wealth varies across investors, the proportional wealth tax remains a uniform drift shift but ceases to be neutral in the economic sense: its real incidence differs across ability types, and the stationary wealth distribution changes shape. We derive the extended Fokker-Planck equation on the joint space of log-wealth and ability, characterise the conditions under which the drift-shift symmetry breaks, and identify the consequences for asset prices and portfolio allocations. The analysis connects the neutrality results of Froseth (2026, arXiv:2603.05264) and the Fokker-Planck dynamics of Froseth (2026, arXiv:2603.05283) to the heterogeneous-returns literature, notably the "use-it-or-lose-it" mechanism of Guvenen, Kambourov, Kuruscu, Ocampo-Diaz and Chen (2023).