Understanding Wealth‐Tax Rates: An Investor‐Utility Mapping to Capital‐Gains Taxes

Abstract

Listen

Translate article

ABSTRACTWealth‐tax rates are formulated as fractions of a capital stock, rather than fractions of income from capital, which makes them difficult to compare with other (income‐based) tax rates. We derive investor‐utility comparisons between wealth‐tax rates and realized capital‐gains tax rates, capturing two crucial features absent in naive comparisons: Risk‐aversion and investment horizon, both of which magnify the effect of wealth taxes vis‐ à‐vis capital‐gains taxes. In numerical calibrations, we show that whereas a 1‐percent wealth tax might naively be judged equivalent to a 10% capital‐gains tax, a more accurate figure for a long‐run risk‐averse investor is 25%.