Minimum-Distortion Wealth Taxation, I: Information-Theoretic versus Transport-Geometric Optimality on the Proportional Class

Anders G Fr{\o}seth

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Abstract: We characterise minimum-distortion wealth taxation under two contrasting normative criteria within a Fokker-Planck framework on log-wealth: the JKO free-energy gap, an information-theoretic measure aligned with the Mirrleesian decision-distortion tradition, and the squared 2-Wasserstein distance from the no-tax distribution at horizon $T$, a transport-geometric measure aligned with the Saez-Zucman distributional-compression tradition. Restricting to the neutrality-preserving (C1)-(C3) schedule class of a companion paper (Froseth 2026), both optima admit closed forms in the two-dimensional design plane parametrised by the corporate-dividend retention $k = (1-\tau_c)(1-\tau_d)$ and the proportional wealth-tax rate $\tau_w$. The JKO optimum partitions the regime axis into three phases as a function of the dimensionless ratio $\rho = \Sigma_0 m_0/\sigma^2$, with $m_0 = \mu - \sigma^2/2$ the geometric mean log-return: a pure wealth-tax phase at low $\rho$, a mixed-instrument phase at intermediate $\rho$, and a pure flow-tax phase at high $\rho$. The $W_2$ optimum, by contrast, is degenerate in this calibration: it pins to the pure flow-tax corner across the whole regime axis. The criterion contrast admits an economically meaningful reading via a bluntness index $B(m_0) = b/(a m_0)$ that measures the wealth-tax channel's mean-displacement-per-revenue overshoot relative to the flow-tax channel; JKO weights $B$ linearly, $W_2$ weights it quadratically, and the two normative traditions correspond to this difference in weighting. Norwegian-flavoured calibrations sit inside the JKO mixed-instrument phase under stock-heavy portfolio volatility but move into the pure flow-tax phase under the realised effective volatility of typical real-estate-heavy households.

Date: 2026-07
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