Perhaps there has been something written on this that someone can point me to. It may be a linear programming problem. We have a target allocation. The question is how do we allocate the investments to our accounts to minimize taxes. The purpose of asset allocation is to attain the highest return for the lowest risk.
Taxes effect the return.
It seems to me that you need to make additional and separate return assumptions based on the tax impact of the holdings. Tax free investments will lower taxes but at the cost of return. High growth, low income investments may accomplish even greater tax and risk efficiency. We need to focus on how much the client keeps after taxes and the risk that is required to attain that return. This is the approach they've taken with their asset allocation software.