Live from the Right-Wing Economists' Self-Made Fresh Inci...

Live from the Right-Wing Economists' Self-Made Fresh Incidence Hell: One more time, morons: will you at least try to understand it if presented this way?

With a fixed required after-tax rate of return r...

A proportional tax t can either be administered as a fraction of factor cost or a fraction of market price...

When a proportional tax t is administered as a fraction of factor cost, so that the after-tax rate of return plus the tax rate times the after-tax rate of return equals market price, then:

(1) $ TR_{initial} = krt $

(2) $ ��TR_{static} = kr��t = TR_{initial}\left(\frac{��t}{t}\right) $

When a proportional tax t is administered as a fraction of market price, so that market price minus the tax rate times the pretax rate of return equals factor cost, then:

(3) $ TR_{initial} = \frac{krt}{1-t} $

(4) $ ��TR_{static} = \left(\frac{kr}{1-t} + \frac{krt}{(1-t)^2}\right)��t $

(5) $ ��TR_{static} = \frac{kr��t}{(1-t)^2} $

(6) $ ��TR_{static} = \left(\frac{1}{1-t}\right)TR_{initial}\left(\frac{��t}{t}\right) $

$ ��TR_{static} $ is transferred from taxes to wages. Mankiw calculates the change in tax revenue via (1)-(2) and the change in wages via (3)-(6). That is where his factor (1-t) comes from: that is how the static gain to wages can be bigger than the loss to tax revenue even though both are the exact same area in the static calculation: they are both (capital stock) x (change in tax wedge between pretax and after-tax returns).

Draw the diagram:

Calculate the area.

One does not simply find that production and preference parameters just drop out of incidence calculations: