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 interactive activity

Taxes Chapter 7
1. The United States imposes an excise tax on the sale of domestic airline tickets.
Let’s assume that in 2015 the total excise tax was $6.10 per airline ticket (consist-
ing of the $3.60 flight segment tax plus the $2.50 September 11 fee). According to
data from the Bureau of Transportation Statistics, in 2015, 643 million passengers
traveled on domestic airline trips at an average price of $380 per trip. The accom-
panying table shows the supply and demand schedules for airline trips. The quan-
tity demanded at the average price of $380 is actual data; the rest is hypothetical.

Quantity of trips Quantity of trips

Price of trip demanded (millions) supplied (millions)
$380.02 642 699
380.00 643 698
378.00 693 693
373.90 793 643
373.82 913 642

a. What is the government tax revenue in 2015 from the excise tax?
b. On January 1, 2016, the total excise tax increased to $6.20 per ticket. What is
the equilibrium quantity of tickets transacted now? What is the average ticket
price now? What is the 2016 government tax revenue?
c. Does this increase in the excise tax increase or decrease government tax revenue?

Solution
1. a. Tax revenue is $6.10 per trip × 643 million trips = $3,922.3 million.
b. The equilibrium quantity now falls to 642 million, with the price rising to
$380.02. Tax revenue rises to $6.20 per trip × 642 million trips = $3,980.40 million.
c. The increase in the excise tax increases government tax revenue.

2. In 1990, the United States began to levy a tax on sales of luxury cars. For simplic-
ity, assume that the tax was an excise tax of $6,000 per car. The accompanying
figure shows hypothetical demand and supply curves for luxury cars.

Price of car
(thousands
of dollars)
$56
55
54
53
52
51 E S
50
49
48 D
47

0 20 40 60 80 100 120 140

Quantity of cars
(thousands)

S-101
S-102 Chapter 7 Ta x e s

a. Under the tax, what is the price paid by consumers? What is the price received
by producers? What is the government tax revenue from the excise tax?
Over time, the tax on luxury automobiles was slowly phased out (and completely
eliminated in 2002). Suppose that the excise tax falls from $6,000 per car to
$4,500 per car.
b. After the reduction in the excise tax from $6,000 to $4,500 per car, what is the
price paid by consumers? What is the price received by producers? What is tax
revenue now?
c. Compare the tax revenue created by the taxes in parts a and b. What accounts
for the change in tax revenue from the reduction in the excise tax?

Solution
2. a. The price paid by consumers is $54,000. The price received by producers
is $48,000. The government’s tax revenue is $6,000 per car × 40,000 cars =
$240 million.
b. The price paid by consumers is now $53,000. The price received by produc-
ers is $48,500. The government’s tax revenue is $4,500 per car × 60,000 cars =
$270 million.
c. The government tax revenue rose as a result of the reduction in the excise tax.
This occurs because the supply of and the demand for luxury automobiles
are both highly elastic: a fall in the price paid by consumers leads to a large
increase in the quantity demanded, and a rise in the price received by produc-
ers leads to a large increase in the quantity supplied. As a result, reducing the
tax leads to a large increase in the quantity of luxury automobiles bought and
sold—so large, in fact, that the increase in the quantity bought and sold more
than makes up for the decrease in the tax per car.

3. All states impose excise taxes on gasoline. According to data from the Federal
Highway Administration, the state of California imposes an excise tax of $0.40
per gallon of gasoline. In 2015, gasoline sales in California totaled 14.6 billion
gallons. What was California’s tax revenue from the gasoline excise tax? If Cali-
fornia doubled the excise tax, would tax revenue double? Why or why not?

Solution
3. Tax revenue is $0.40 per gallon × 14.6 billion gallons = $5.84 billion. Doubling
the excise tax would reduce the amount of gasoline bought and sold, and tax
revenue would less than double. The exception would be a case in which either
demand or supply is perfectly inelastic; only in that special case would the
quantity transacted not change as a result of the imposition of the excise tax,
and tax revenue would—in this special case only—double as a result of a dou-
bling in the excise tax rate.

4. In the United States, each state government can impose its own excise tax on
the sale of cigarettes. Suppose that in the state of North Texarkana, the state
government imposes a tax of $2.00 per pack sold within the state. In contrast,
the neighboring state of South Texarkana imposes no excise tax on cigarettes.
Assume that in both states the pre-tax price of a pack of cigarettes is $1.00.
Assume that the total cost to a resident of North Texarkana to smuggle a pack
of cigarettes from South Texarkana is $1.85 per pack. (This includes the cost of
time, gasoline, and so on.) Assume that the supply curve for cigarettes is neither
perfectly elastic nor perfectly inelastic.
a. Draw a diagram of the supply and demand curves for cigarettes in North
Texarkana showing a situation in which it makes economic sense for a
North Texarkanan to smuggle a pack of cigarettes from South Texarkana to
North Texarkana. Explain your diagram.
b. Draw a corresponding diagram showing a situation in which it does not make
economic sense for a North Texarkanan to smuggle a pack of cigarettes from
South Texarkana to North Texarkana. Explain your diagram.
 Chapter 7 Ta x e s S-103

c. Suppose the demand for cigarettes in North Texarkana is perfectly inelastic.

Draw a corresponding diagram to illustrate how high the cost of smuggling a
pack of cigarettes could go until a North Texarkanan no longer found it profit-
able to smuggle. Explain your diagram.
d. Still assume that demand for cigarettes in North Texarkana is perfectly inelas-
tic and that all smokers in North Texarkana are smuggling their cigarettes at
a cost of $1.85 per pack, so no tax is paid. Is there any inefficiency in this situ-
ation? If so, how much per pack? Suppose chip-embedded cigarette packaging
makes it impossible to smuggle cigarettes across the state border. Is there any
inefficiency in this situation? If so, how much per pack?

Solution
4. a. In the accompanying figure, the demand for cigarettes in North Texarkana is
relatively inelastic. So most of the $2.00 tax is borne by consumers, who pay
an after-tax price of $2.95. Since it would cost $2.85 to purchase and smuggle
a pack from South Texarkana ($1.00 price per pack + $1.85 smuggling cost per
pack), this diagram illustrates a situation in which a North Texarkanan would
be better off smuggling rather than purchasing cigarettes in North Texarkana.

Price of
cigarettes
(per pack) S
A
$2.95

Excise tax
= $2.00 per pack

1.00 E
0.95
B
D

0 Quantity of cigarettes
(packs)

b. In the accompanying diagram, the demand in North Texarkana is less inelas-

tic. As a result, consumers pay an after-tax price of $2.50. In this case, it does
not make economic sense to smuggle.

Price of
cigarettes
(per pack) S

A
$2.50

Excise tax
= $2.00 per pack
1.00 E
0.50
B
D
0 Quantity of cigarettes
(packs)
S-104 Chapter 7 Ta x e s

c. As shown in the accompanying diagram, if the demand for cigarettes in North

Texarkana is perfectly inelastic, the demand curve is a vertical line and all of
the tax is borne by consumers. In that case, the after-tax price paid by North
Texarkanans is $3.00. So the cost of smuggling could go as high as $1.99, and
North Texarkanans would still be better off smuggling; at a cost of $2.00 to
smuggle, they would be indifferent between smuggling and purchasing their
cigarettes in their home state.

Price of
cigarettes
(per pack)
A S
$3.00

Excise tax
= $2.00 per pack

1.00 E

D
0 Quantity of cigarettes
(packs)

d. Since demand is perfectly inelastic, the same number of cigarettes are trans-
acted after the tax is imposed compared to before the tax is imposed. But
there is still an inefficiency incurred in this situation despite the fact that no
tax is paid and no transactions are discouraged: it is the $1.85 that is spent to
smuggle a pack of cigarettes. This is the value of resources spent to evade the
tax that consumers would have preferred to spend on other goods and activi-
ties. If technology eliminates smuggling altogether, there is no inefficiency.
Because demand is perfectly inelastic, no transactions are discouraged by the
tax, and all of the surplus lost by consumers is captured by the government as
tax revenue.

5. In each of the following cases involving taxes, explain: (i) whether the incidence
of the tax falls more heavily on consumers or producers, (ii) why government
revenue raised from the tax is not a good indicator of the true cost of the tax,
and (iii) how deadweight loss arises as a result of the tax.
a. The government imposes an excise tax on the sale of all college textbooks.
Before the tax was imposed, 1 million textbooks were sold every year at a
price of $50. After the tax is imposed, 600,000 books are sold yearly; students
pay $55 per book, $30 of which publishers receive.
b. The government imposes an excise tax on the sale of all airline tickets. Before
the tax was imposed, 3 million airline tickets were sold every year at a price of
$500. After the tax is imposed, 1.5 million tickets are sold yearly; travelers pay
$550 per ticket, $450 of which the airlines receive.
c. The government imposes an excise tax on the sale of all toothbrushes. Before
the tax, 2 million toothbrushes were sold every year at a price of $1.50. After
the tax is imposed, 800,000 toothbrushes are sold every year; consumers pay
$2 per toothbrush, $1.25 of which producers receive.

Solution
5. a. After the imposition of the tax, consumers pay $5 more per book than before;
publishers receive $20 less per book than before. Producers (publishers) bear
more of the tax. The tax is $55 − $30 = $25 per book, and 600,000 books are
bought and sold. So government revenue is $15 million. This, however, is a
poor estimate of the cost of the tax, since it does not take into account the fact
that, in addition to the higher price, there are now 400,000 potential
 Chapter 7 Ta x e s S-105

consumers who would have bought the books without the tax but no longer
will buy them. Deadweight loss arises because consumers and producers lose
surplus that is not captured as government revenue. That loss in surplus is
accounted for by the 400,000 potential consumers and publishers who would
have made transactions without the tax but do not once the tax is levied.
b. After the imposition of the tax, travelers pay $50 more per ticket than before;
airlines receive $50 less than before. The tax is split evenly between consumers
and producers. The tax is $550 − $450 = $100 per ticket, and 1.5 million tickets
are bought and sold. So government revenue is $150 million. This, however, is
a poor estimate of the cost of the tax, since it does not take into account the
fact that, in addition to 1.5 million travelers paying higher prices, there are
now 1.5 million potential consumers who would have bought tickets without
the tax but no longer buy tickets. Deadweight loss arises because consumers
and producers lose surplus that is not captured as government revenue. That
loss in surplus is represented by the 1.5 million tickets that would have been
transacted at the pre-tax price but are not transacted once the tax is levied.
c. After the imposition of the tax, consumers pay $0.50 more per toothbrush
than before; producers receive $0.25 less than before. The incidence of the tax
falls mainly on consumers. The tax is $2.00 − $1.25 = $0.75 per toothbrush,
and 800,000 toothbrushes are bought and sold. So government revenue is
$600,000. This, however, is a poor estimate of the cost of the tax, since it does
not take into account the fact that, in addition to 800,000 toothbrushes now
being more expensive, there are 1.2 million toothbrushes that would have
been transacted without the tax but are no longer transacted. Inefficiency
arises because consumers and producers lose surplus that is not captured
as government revenue. That loss in surplus is represented by the 1.2 million
toothbrushes that would have been transacted at the pre-tax price but are not
transacted once the tax is levied.

6. The accompanying diagram shows the market for cigarettes. The current equi-
librium price per pack is $4, and every day 40 million packs of cigarettes are
sold. In order to recover some of the health care costs associated with smoking,
the government imposes a tax of $2 per pack. This will raise the equilibrium
price to $5 per pack and reduce the equilibrium quantity to 30 million packs.

Price of
cigarettes
(per pack)
$8

S
Excise 5
tax = $2 4 E
3
D

0 30 40
Quantity of cigarettes
(millions of packs per day)

The economist working for the tobacco lobby claims that this tax will reduce
consumer surplus for smokers by $40 million per day, since 40 million packs
now cost $1 more per pack. The economist working for the lobby for sufferers
of second-hand smoke argues that this is an enormous overestimate and that
the reduction in consumer surplus will be only $30 million per day, since after
the imposition of the tax only 30 million packs of cigarettes will be bought and
each of these packs will now cost $1 more. They are both wrong. Why? Include a
­calculation of consumer surplus before and after the tax in your answer.
S-106 Chapter 7 Ta x e s

Solution
6. The economist working for the tobacco lobby is overestimating the change in
consumer surplus. She is assuming that there will be no change in the quantity
demanded and that consumers will continue to smoke 40 million packs of ciga-
rettes per day even when the price has risen by $1 per pack. The economist work-
ing for the second-hand smoke lobby is underestimating the loss of consumer
surplus. He calculates the loss of consumer surplus to be $30 million: $1 per
pack times the number of packs per day that are still sold, 30 million. He fails to
count the loss of consumer surplus to those who smoke less or none at all after
the tax, accounted for by the fall in consumption from 40 million to 30 million
packs per day.
We can calculate the loss in consumer surplus from the tax by comparing
the total consumer surplus before the tax is levied to the total consumer sur-
plus after. Recall that the area of a triangle is 1⁄2 × the base of the triangle × the
height of the triangle. Before the tax the consumer surplus was 1⁄2 × ($8 − $4) ×
40 million = $80 million. After the tax, the consumer surplus is 1⁄2 × ($8 − $5) ×
30 million = $45 million. The reduction in consumer surplus is $80 million − $45
million = $35 million.

7. Consider the original market for pizza in Collegetown, illustrated in the accom-
panying table. Collegetown officials decide to impose an excise tax on pizza of
$4 per pizza.

Quantity of pizza Quantity of pizza

Price of pizza demanded supplied
$10 0 6
9 1 5
8 2 4
7 3 3
6 4 2
5 5 1
4 6 0
3 7 0
2 8 0
1 9 0

a. What is the quantity of pizza bought and sold after the imposition of the tax?
What is the price paid by consumers? What is the price received by producers?
b. Calculate the consumer surplus and the producer surplus after the imposition
of the tax. By how much has the imposition of the tax reduced consumer sur-
plus? By how much has it reduced producer surplus?
c. How much tax revenue does Collegetown earn from this tax?
d. Calculate the deadweight loss from this tax.

Solution
7. a. The tax drives a wedge between the price paid by consumers and the price
received by producers. Consumers now pay $9, and producers receive $5. So
after the imposition of the tax, the quantity bought and sold will be one pizza.
b. Consumer surplus is now zero (the one consumer who still buys a pizza at $9
has a willingness to pay of just $9, so that the consumer surplus is $9 − $9 =
$0). Compared to the situation before the imposition of the tax, where the
equilibrium price was $7, consumer surplus has fallen by $3. (At a price of $7,
the person willing to pay $9 receives surplus of $2, the person willing to pay
$8 receives surplus of $1, and the person willing to pay $7 receives surplus of
$0.) Similarly, the producer of the one pizza has a cost of $5, and this is
 Chapter 7 Ta x e s S-107

the price he receives, so producer surplus is also zero. Compared to pre-tax

producer surplus, it has fallen by $3. (At a price of $7, the producer willing
to accept $5 receives surplus of $2, the producer willing to accept $6 receives
surplus of $1, and the producer willing to accept $7 receives surplus of $0.)
c. Collegetown earns a tax of $4 per pizza sold, which is a total tax revenue of $4.
d. Total surplus has been decreased by $6. Of that $6, the town earns $4 in
­revenue, but $2 of surplus is lost. The deadweight loss from this tax is $2.

8. The state needs to raise money, and the governor has a choice of imposing an
excise tax of the same amount on one of two previously untaxed goods: restau-
rant meals or gasoline. Both the demand for and the supply of restaurant meals
are more elastic than the demand for and the supply of gasoline. If the governor
wants to minimize the deadweight loss caused by the tax, which good should be
taxed? For each good, draw a diagram that illustrates the deadweight loss from
taxation.

Solution
8. The tax should be imposed on sales of gasoline. Since both demand for and
supply of gasoline are less elastic, changes in the price of gasoline will result in
smaller reductions in the quantity demanded and quantity supplied. As a result,
fewer transactions are discouraged by the tax—in other words, less total surplus
(consumer and producer surplus) is lost. Panel (a) of the accompanying diagram
illustrates a tax imposed on sales of gasoline, for which both demand and supply
are less elastic; panel (b) illustrates a tax imposed on sales of restaurant meals,
for which both demand and supply are more elastic. As you can see, deadweight
loss, the shaded triangle, is larger in panel (b) than in panel (a).

Panel (a) Panel (b)

Price of Price of
gasoline S restaurant
meal
S

Excise Excise
tax E tax E

Quantity of gasoline Quantity of restaurant meals

9. Assume that demand for gasoline is inelastic and supply is relatively elastic. The
government imposes a sales tax on gasoline. The tax revenue is used to fund
research into clean fuel alternatives to gasoline, which will improve the air we
all breathe.
a. Who bears more of the burden of this tax, consumers or producers? Show in a
diagram who bears how much of the excess burden.
b. Is this tax based on the benefits principle or the ability-to-pay principle?
Explain.
S-108 Chapter 7 Ta x e s

Solution
9. a. The accompanying diagram shows an inelastic (relatively steep) demand curve
for gasoline. The tax, whether imposed on consumers or producers, drives
a wedge between the price paid by consumers, PC , and the price received by
producers, PP. The burden of the tax is illustrated by the yellow and green
areas A and B. Area A is the loss of consumer surplus—the burden of the tax
that falls on consumers. Area B is the loss of producer surplus—the burden of
the tax that falls on producers. Here, the burden is borne predominantly by
consumers.

Price
PC S
A

PP

Quantity

b. Consumers who drive cars that use more gasoline pay most of the tax. If this
tax were based on the benefits principle, the tax revenue would have to ben-
efit those who pay most of the tax. However, everyone benefits equally from
research into cleaner fuel, because of the improvement in air quality, so the
tax is not based on the benefits principle. If this tax were based on the ability-
to-pay principle, more of the tax would have to be paid by those who have a
greater ability to pay. This would be true if cars that consume more gasoline
were driven largely by higher-income individuals. To some extent this may be
true: higher-income individuals drive larger cars, SUVs, and so on, and to the
extent to which this is true, the tax is based on the ability-to-pay principle.
However, a significant number of lower-income individuals drive old, fuel-
inefficient cars. To the extent to which this is true, the tax is not based on the
ability-to-pay principle.

10. Assess the following four tax policies in terms of the benefits principle versus the
ability-to-pay principle.
a. A tax on gasoline that finances maintenance of state roads
b. An 8% tax on imported goods valued in excess of $800 per household brought
in on passenger flights
c. Airline-flight landing fees that pay for air traffic control
d. A reduction in the amount of income tax paid based on the number of depen-
dent children in the household

Solution
10. a. This tax is based on the benefits principle, since the people who use the state’s
roads will be the ones paying the gasoline tax.
b. This tax is based on the ability-to-pay principle, since the people paying the
tax will presumably be individuals who buy expensive items abroad and then
import them on passenger flights.
c. This tax is based on the benefits principle, since the airlines pay the landing
fee and are also the beneficiary of air traffic control services.
d. This reduction is based on the ability-to-pay principle. People who have more
dependent children in their household will have higher expenses and so are
less able to pay a given amount of income taxes, other things equal.
 Chapter 7 Ta x e s S-109

11. For this Discovering Data exercise, use FRED (fred.stlouisfed.org) to

create a graph comparing the sources of government tax revenue for the
United States over time. Under the tools tab select “Published Data Lists.” Find
the list “Government Revenue by Source” and create a line graph that combines
all three series.
a. Using data from your graph, which source of government revenue is the larg-
est? How have revenue sources changed over time?
To measure the growth of government revenue since the start of the 2007
r­ ecession, follow these steps to format your graph as an index graph where
2007-12-01 = 100.
i. Select “Edit Graph” and under “Edit Line 1” change “Units” to
“Index (Scale value to 100 for chosen data).”
       ii. In the box “U.S. recession” select “2007-12-01 Start” and then
“Copy to All.”
iii. In the graph frame change the time span from 2007-10-01 to
today.
b. Using the values in the graph, calculate the growth rate of each source of
­government revenue since 2007-12-01. Which has grown the fastest?
Finally, edit your graph to compare how each source of revenue has changed as
a percentage of total revenue. Complete the steps for each line:
i. Under “Edit Line” change “Units” to “Billions of Dollars.”
       ii. Under “Customize data” add the series “Federal Government Current
Receipts” (code FGRECPT).
iii. In the formula box enter “100*(a/b)” to express each series as a percentage
of total tax receipts.
    iv. In the graph frame change the time frame to “Max.”
c. Use your graph to explain how the three sources of government revenue have
changed over time and what happened to each source of revenue during the
Great Recession.

Solution
11. a. Answers to this Discovering Data exercise can be found online.

12. You are advising the government on how to pay for national defense. There are
two proposals for a tax system to fund national defense. Under both proposals,
the tax base is an individual’s income. Under proposal A, all citizens pay exactly
the same lump-sum tax, regardless of income. Under proposal B, individuals
with higher incomes pay a greater proportion of their income in taxes.
a. Is the tax in proposal A progressive, proportional, or regressive? What about
the tax in proposal B?
b. Is the tax in proposal A based on the ability-to-pay principle or on the benefits
principle? What about the tax in proposal B?
c. In terms of efficiency, which tax is better? Explain.

Solution
12. a. The tax in proposal A is regressive: since everyone pays the same dollar
amount in taxes, higher-income individuals pay a lower percentage of their
income in taxes. The tax in proposal B is progressive: higher-income individu-
als pay a higher percentage of their income in taxes.
b. Every citizen benefits equally from national defense. The tax in proposal A is
based on the benefits principle: since everyone benefits equally, everyone pays
equally. The tax in proposal B is based on the ability-to-pay principle: higher-
income individuals are able to pay more taxes, and under this proposal they
do pay more taxes.
S-110 Chapter 7 Ta x e s

c. In terms of efficiency, the lump-sum tax is better. The lump-sum tax cre-
ates a marginal tax rate of zero: once the tax is paid, every additional dollar
earned is no longer taxed. Since it does not depend on people’s actions (how
much income they choose to earn), it does not distort their incentives to earn
income. The tax in proposal B has a higher marginal tax rate: each additional
dollar of income earned is taxed. And the marginal tax rate is increasing: each
additional dollar of income earned is taxed more than the previous d ­ ollar. This
creates inefficiency, because it distorts the incentive to earn more income.

13. Each of the following tax proposals has income as the tax base. In each case,
calculate the marginal tax rate for each level of income. Then calculate the
percentage of income paid in taxes for an individual with a pre-tax income
of $5,000 and for an individual with a pre-tax income of $40,000. Classify the
tax as being proportional, progressive, or regressive. (Hint: You can calculate
the marginal tax rate as the percentage of an additional $1 in income that is
taxed away.)
a. All income is taxed at 20%.
b. All income up to $10,000 is tax-free. All income above $10,000 is taxed at a
constant rate of 20%.
c. All income between $0 and $10,000 is taxed at 10%. All income between
$10,000 and $20,000 is taxed at 20%. All income higher than $20,000 is taxed
at 30%.
d. Each individual who earns more than $10,000 pays a lump-sum tax of $10,000.
If the individual’s income is less than $10,000, that individual pays in taxes
exactly what his or her income is.
e. Of the four tax policies, which is likely to cause the worst incentive problems?
Explain.

Solution
13. a. The marginal tax rate is 20% regardless of the taxpayer’s income level: on
each additional $1 in income, individuals pay $0.20 in taxes, which is 20%. An
individual with a pre-tax income of $5,000 would pay $5,000 × 20% = $1,000 in
taxes; this is 20% of his or her income. An individual with a pre-tax income of
$40,000 would pay $40,000 × 20% = $8,000 in taxes; this is 20% of his or her
income. Since each individual pays the same percentage of income in taxes,
regardless of income level, this tax is proportional.
b. On income up to $10,000, there is a zero marginal tax rate: on each additional
$1 of income in this tax bracket, individuals pay $0.00 in taxes, which is 0%.
On income over $10,000, there is a 20% marginal tax rate: on each additional
$1 of income in this tax bracket, individuals pay $0.20 in taxes, which is 20%.
An individual with a pre-tax income of $5,000 would pay $5,000 × 0% = $0
in taxes; this is 0% of his or her income. An individual with a pre-tax income
of $40,000 would pay $10,000 × 0% + $30,000 × 20% = $6,000 in taxes; this
is $6,000/$40,000 × 100 = 15% of his or her income. This tax is progressive
because the percentage of income paid in taxes rises as income rises.
c. The marginal tax rate is 10% on the first $10,000 of income: on each addi-
tional $1 of income in this tax bracket, individuals pay $0.10 in taxes, which
is 10%. It is 20% on the next $10,000 of income: on each additional $1 of
income in this tax bracket, individuals pay $0.20 in taxes, which is 20%. It is
30% on all income above $20,000: on each additional $1 of income in this tax
bracket, individuals pay $0.30 in taxes, which is 30%. An individual with a
pre-tax income of $5,000 would pay $5,000 × 10% = $500 in taxes; this is 10%
of his or her income. An individual with a pre-tax income of $40,000 would
pay $10,000 × 10% + $10,000 × 20% + $20,000 × 30% = $9,000 in taxes; this is
$9,000/$40,000 × 100 = 22.5% of his or her income. Again, this tax is progres-
sive because the percentage of income paid in taxes rises as income rises.
d. For individuals who earn less than $10,000, the marginal tax rate is 100%,
since all additional income is taxed away. For those who earn more than
$10,000, the marginal tax rate is zero: they pay the same amount of
 Chapter 7 Ta x e s S-111

tax—$10,000—regardless of how much they earn over $10,000. An individual

with a pre-tax income of $5,000 would pay $5,000 × 100% = $5,000 in taxes;
this is 100% of his or her income. An individual with a pre-tax income of
$40,000 would pay $10,000 in taxes; this is $10,000/$40,000 × 100 = 25% of
his or her income. This tax policy is regressive because those with higher
incomes pay a smaller share of their income in taxes than those with lower
incomes.
e. The tax policy in part d is likely to cause the worst incentive problems. People
who work and make less than $10,000 will receive zero income after taxes are
paid. As a result, there is no incentive to work.

14. In Transylvania the basic income tax system is fairly simple. The first 40,000 syl-
vers (the official currency of Transylvania) earned each year are free of income
tax. Any additional income is taxed at a rate of 25%. In addition, every indi-
vidual pays a social security tax, which is calculated as follows: all income up
to 80,000 sylvers is taxed at an additional 20%, but there is no additional social
security tax on income above 80,000 sylvers.
a. Calculate the marginal tax rates (including income tax and social security tax)
for Transylvanians with the following levels of income: 20,000 sylvers, 40,000
sylvers, and 80,000 sylvers. (Hint: You can calculate the marginal tax rate as
the percentage of an additional 1 sylver in income that is taxed away.)
b. Is the income tax in Transylvania progressive, regressive, or proportional? Is
the social security tax progressive, regressive, or proportional?
c. Which income group’s incentives are most adversely affected by the combined
income and social security tax systems?

Solution
14. a. An individual who earns 20,000 sylvers pays no income tax but pays 20% of
his or her income in social security tax. So the marginal tax rate is 20%.
 A n individual who earns 40,000 sylvers pays no income tax and pays 20%
of his or her income in social security tax. But on an additional sylver (that
is, on income above 40,000 sylvers) this individual pays a 45% tax (the basic
income tax plus the social security tax). So the marginal tax rate is 45%.
 A n individual who earns 80,000 sylvers pays a marginal income tax rate
of 25% and 20% in social security tax. But on an additional sylver (that is, on
income above 80,000 sylvers), this individual pays only 25% (the income tax
rate) because there is no social security tax on income over 80,000 sylvers. So
this individual’s marginal tax rate is 25%.
b. The Transylvanian income tax system is progressive because the percentage
of income paid in income taxes rises as income rises. But the social security
tax system is a mix of proportional and regressive because the percentage
of income paid in social security tax is constant at 20% up to an income of
80,000 sylvers, and then it falls to zero as income increases further. This
makes the social security tax regressive overall.
c. In this system, incentive problems are worst for middle-income individuals
(between 40,000 and 80,000 sylvers) because they have the highest marginal
tax rate, 45%.

15. You work for the Council of Economic Advisers, providing economic
advice to the White House. The president wants to overhaul the income tax sys-
tem and asks your advice. Suppose that the current income tax system consists
of a proportional tax of 10% on all income and that there is one person in the
country who earns $110 million; everyone else earns less than $100 million. The
president proposes a tax cut targeted at the very rich so that the new tax system
would consist of a proportional tax of 10% on all income up to $100 million and
a marginal tax rate of 0% (no tax) on income above $100 million. You are asked
to evaluate this tax proposal.
a. For incomes of $100 million or less, is this proposed tax system p
­ rogressive,
regressive, or proportional? For incomes of more than $100 million? Explain.
S-112 Chapter 7 Ta x e s

b. Would this tax system create more or less tax revenue, other things equal? Is
this tax system more or less efficient than the current tax system? Explain.

Solution
15. a. This tax system is proportional up to an income of $100 million. Above $100
million, the tax is regressive, since higher-income taxpayers pay a smaller
­percentage of their income in taxes. For instance, the individual with income
of $110 million pays $100 million × 10% = $10 million in taxes, which is
$10 million/$110 million × 100 = 9% of his or her income in taxes. But an
­individual with an even higher income, say $200 million, would pay $100
­million × 10% = $10 million in taxes, which is $10 million/$200 million × 100 =
5% of his or her income in taxes.
b. This tax system would raise almost the same amount of tax revenue, since for
all individuals, except for the one richest individual, it is identical to the cur-
rent tax system. The richest individual pays $10 million in taxes, except the
new tax system now creates an incentive for that individual to work to raise
his or her income: an additional dollar of income is now worth exactly one
additional dollar. Under the current system, an additional dollar of income for
the top earner would only be worth an additional 90 cents. So this tax system
is more efficient than the current tax system.

WORK IT OUT Interactive step-by-step help with solving this

problem can be found online.

16. The U.S. government wants to help the American auto industry compete
against foreign automakers that sell trucks in the United States. It can do
this by imposing an excise tax on each foreign truck sold in the United
States. The hypothetical pre-tax demand and supply schedules for imported
trucks are given in this table.

Quantity of imported trucks

(thousands)
Price of
imported truck Quantity demanded Quantity supplied
$32,000 100 400
31,000 200 350
30,000 300 300
29,000 400 250
28,000 500 200
27,000 600 150

a. In the absence of government interference, what is the equilibrium

price of an imported truck? The equilibrium quantity? Illustrate with a
diagram.
b. Assume that the government imposes an excise tax of $3,000 per imported
truck. Illustrate the effect of this excise tax in your diagram from part a.
How many imported trucks are now purchased and at what price? How
much does the foreign automaker receive per truck?
c. Calculate the government revenue raised by the excise tax in part b. Illus-
trate it on your diagram.
d. How does the excise tax on imported trucks benefit American automak-
ers? Whom does it hurt? How does inefficiency arise from this govern-
ment policy?
 Chapter 7 Ta x e s S-113

Solution
16. a. The equilibrium price without government interference is $30,000 and the
equilibrium quantity is 300,000, as shown by point E in the accompanying
diagram.

Price of
imported truck
S
$32,000
31,000
Excise tax = 30,000 E
$3,000 per
truck 29,000
28,000
27,000 D

0 100 200 300 400 500 600

Quantity of imported trucks
(thousands)

b. The effect of the excise tax is illustrated in the diagram: a tax of $3,000 per
truck puts a wedge between the price paid by consumers, or the demand price
($31,000), and the price received by producers, or the supply price ($28,000).
The quantity bought and sold is 200,000 trucks. The foreign automaker
receives $28,000 per truck (after tax).
c. Since 200,000 trucks are sold, and the government earns a tax of $3,000 on
each truck, the total tax revenue is 200,000 × $3,000 = $600 million. This is the
shaded area in the diagram.
d. The excise tax leads to a rise in the price of imported trucks. Since American
trucks are substitutes for imported trucks, the effect of the tax is to increase the
demand for American-made trucks, which leads to a higher price for them. As a
result, buyers of both domestic and foreign trucks pay higher prices because of
the tax on foreign trucks. Inefficiency arises because some mutually beneficial
transactions no longer occur due to the higher prices for trucks caused by the tax.
Another random document with
no related content on Scribd:
272
Samar 5,040
13,054
Saranguani 36
93
Semerara 23
60
Siargao 134
347
Sibuyan 131
339
Siquijor 83
215
Sulu, or Jolo 241
624
Tablas 250
648
Ticao 94
243
Ybayat, or Ibayat 22
57
Ylin 24
62

GROUPS.

Alabat 76
197
Jomalig

Banton 44
114
Simara
 Romblon

Daram 41
106
Buad

Camotes group: 74
192
Ponson
Poro
Pasijan

Calaguas group:
Tinagua 19
49
Guintinua

Cuyos group: 28
73
Cuyos
Cugo
Agutaya
Hamipo
Bisukei

Laguan 23
60
Batag

Limbancauyan 184
477
Mesa, or Talajit
Maripipi
 Balupiri
Biliran

Lubang 53 163
Ambil
Golo

San Miguel 82 212

Batan
Cacraray
Rapurrapu

Tawi Tawi group: 183 414

Tawi Tawi
Tabulinga
Tandubato

Others of the
Tawi Tawi group. 54 140

Total measured 118,542 307,025

Estimated area of
unmeasured islands 1,000 2,500

Total area 119,542 309,615

{368}

Length of general shore line.

Name. Miles
Kilometers
 Bohol 161
259
Cebu 310
499
Jolo Archipelago 858
1,381
Kalamines 126
203
Leite 363
584
Luzon 2,144
3,450
Masbate 244
393
Mindanao 1,592
2,562
Mindoro 322
518
Negros 386
621
Palawan 644
1,036
Panay 377
607
Samar 412
663
Minor islands 3,505
5,641

Total 11,444
18,417
"The following [as to population] is a quotation from an
article by W. F. Wilcox, of the United States Census Bureau.
It is well to notice that the last official census was in 1887
and that the figures of that census, though probably
underestimating the population of the islands, are the ones
which, in default of better, we are obliged to take as final.
It is probable that these are an understatement of the true
population of the Philippines for several reasons, among which
is one not observed by Mr. Wilcox, and which is therefore
mentioned. It is, of course, only supposition, but is at least
suggestive. For every adult counted in the census the
officials were obliged to return a poll tax. Thus, for
instance, if 100,000 persons were counted 100,000 pesetas
would have to be returned to the treasury. It has therefore
been supposed that the officials counted, say, 150,000 and
returned only 100,000 pesetas and 100,000 names. Mr. Wilcox
says (American Statistical Association Publ., September,
1899): 'The population of the islands in 1872 was stated in a
letter to Nature (6:162), from Manila, by Dr. A. B. Meyer, who
gives the latest not yet published statistics as his
authority. The letter gives the population of nine islands, as
follows:

Luzon 4,467,111
Panay 1,052,586
Cebu 427,356
Leite 285,495
Bohol 283,515
Negros 255,873
Samar 250,062
Mindanao 191,802
Mindoro 70,926

"It also gives the population of each of the 43 provinces of

the islands. The population was not counted, but estimated.
The number who paid tribute was stated as 1,232,544. How this
 was ascertained we are not informed. The total population,
7,451,352, was approximated 'on the supposition that about the
sixth part of the whole has to pay tribute.' In reality this
population is 6.046 times the assigned tribute-paying
population. But Dr. Meyer adds: 'As there exist in all the
islands, even in Luzon, independent tribes and a large number
in Mindanao, the number of 7,451,352 gives no correct idea of
the real population of the Philippines. This is not known at
all and will not be known for a long time to come.'

"Since 1872 there have been actual enumerations of the

Philippines, but authorities differ as to the time when they
occurred and the detailed results. These enumerations were
usually confined to the subject and Catholic population, and
omitted the heathen, Mohammedan, and independent tribes. Four
reports of the entire population have been printed:

1. A report made by the religious orders in 1876 or 1877, in

which the nationalities and creeds of the population were
distinguished.

2. A manuscript report to Professor Blumentritt of the

enumeration made by the religious orders in December, 1879.

3. The official report of the civil census of December 31,

1877, contained in Reseña geog. y estad. de España, 1888, p.
1079.

4. The official report upon the census taken by the civil

officers December 31, 1887, and printed in the first volume of
Censo de la Poblacion de España, at Madrid, in 1891.

The first two may be compared, and tend somewhat to

corroborate each other, as follows:

1. Tribute-paying natives.
5,501,356
 2. Army
14,545
3. Navy
2,924
4. Religious officers (Geistlichkeit)
1,962
5. Civil officers
5,552
6. Other Spaniards
13,265

Total Spaniards
38,248

1876-77.
1879.
Total Catholics 5,539,604
5,777,522
Heathen and Mohammedan natives 602,853
632,640
Foreigners (In 1876 there were:
British, 176; German, 109;
Americans, 42; French, 30) 378
592
Chinese 30,797
39,054

Total 6,173,632
6,449,813
"The third enumeration reported 5,567,685 as the
tribute-paying population. To this number should be added the
estimated number of the independent tribes, 'Indios no
sometidos'; this according to the missionaries' count was
about 600,000, making a total of 6,167,685. Most experts agree
that this official report is untrustworthy and involves
serious omissions, but believe that the facts are so
imperfectly known that they are unable to correct it. One
author, del Pac, writing in 1882, started from the
missionaries' census of 1876-77, viz, 6,173,632, assumed that
this omitted as many as 600,000 members of independent tribes
and that the increase of 1876-1882 would be 740,000. In this
way he got 7,513,632. A second writer, Sanciano, estimated the
population in 1881 as 10,260,249. The missionaries made an
estimate of their own in 1885 which showed 9,529,841.
Seat of War in the Island of Luzon.

{369}

"The fourth enumeration of those mentioned above showed a

population of 5,985,123 in 1887, and the totals both for the
group as a whole and for the fifty odd provinces tend to
confirm and to be confirmed by the civil count of 1877. This
number, however, represents only the nominally Catholic or
tribute-paying population. To it must be added the Mohammedan
or heathen tribes set down by clerical authorities as about
600,000. Perhaps the highest authority in this field,
Professor Blumentritt, is confident that this number does not
include all the independent tribes, but only those in the
mountains who have a special arrangement freeing them from all
the dues of the subject tribes. On the whole, therefore, Prof.
H. Wagner is inclined to estimate these omissions of
independent or non-Christian tribes at about 1,000,000 and the
population of the group at about 7,000,000. This result is
indorsed by the latest German authority, Hübner's
Geographisch-Statistische Tabellen for 1898, which gives the
population as
5,985,124 + 1,000,000 = 6,985,124, as follows:

Spanish
Estimated number
census.
not counted.

Luzon and adjacent islands 3,443,000

150,000
Mindoro and Masbate 126,000
100,000
Visayas Archipelago 2,181,000
200,000
 Mindanao 209,000
400,000
Calamianes and Palawan 22,000
50,000
Jolo (Sulu) Islands 4,000
100,000

Total 5,985,000
1,000,000

"Personally I am disposed to suspect that this number,

although called by Professor Wagner an outside estimate, is
below rather than above the truth. In favor of this position
it may be urged that Professor Wagner's estimate makes no
allowance either for the natural increase of population,
1887-1898, or for the fact that the first careful census of
densely populated regions, like India and Japan, usually
reveals a larger population than had been previously
estimated. This analogy might reasonably be applied to Luzon
and the Visayas."

United States, 56th Congress, 1st Session,

Senate Document Number 171, pages 4-7.

PHILIPPINE ISLANDS:
The native inhabitants.

"The inhabitants of the Philippines belong to three sharply

distinct races—the Negrito race, the Indonesian race, and the
Malayan race. It is universally conceded that the Negritos of
to-day are the disappearing remnants of a people which once
populated the entire archipelago. They are, physically,
weaklings of low stature, with black skin, closely-curling
hair, flat noses, thick lips, and large, clumsy feet. In the
matter of intelligence they stand at or near the bottom of the
human series, and they are believed to be incapable of any
considerable degree of civilization or advancement. Centuries
ago they were driven from the coast regions into the wilder
interior portions of the islands by Malay invaders, and from
that day to this they have steadily lost ground in the
struggle for existence, until but a few scattered and
numerically insignificant groups of them remain. … It is
believed that not more than 25,000 of them exist in the entire
archipelago, and the race seems doomed to early extinction. …

"So far as is at present known, the Philippine tribes

belonging to the Indonesian race are confined to the great
island of Mindanao, the surface of which constitutes about
one-third of the total land area of the archipelago. … The
Philippine representatives of this race are physically
superior not only to the Negritos, but to the more numerous
Malayan peoples as well. They are tall and well developed,
with high foreheads, aquiline noses, wavy hair, and often with
abundant beards. The color of their skins is quite light. Many
of them are very clever and intelligent. None of the tribes
have been Christianized. Some of them have grown extremely
fierce and warlike as a result of their long struggle with
hostile Malayan peoples. Others, more happy in their
surroundings, are pacific and industrious.

"The great majority of the inhabitants of the Philippines are

of Malayan extraction, although the race is not found pure in
any of the islands, but is everywhere more or less modified
through intermarriage with Chinese, Indonesians, Negritos,
Arabs, and, to a limited extent, Spaniards and other
Europeans. The individuals belonging to these Malayan tribes
are of medium size, with straight black hair. As a rule the
men are beardless, and when they have a beard it is usually
straggling, and appears late in life. The skin is brown and
distinctly darker than that of the Indonesians, although very
much lighter than that of the Negritos. The nose is short and
frequently considerably flattened. The representatives of
these three races are divided into numerous tribes, which
 often differ very greatly in language, manners, customs, and
laws, as well as in degree of civilization. …

"Any estimate of the total population must manifestly depend

on the number of inhabitants assigned to the various wild
tribes, of which there are no less than 69. For the purposes
of this report the commission has adopted as the total figure
8,000,000, considering this a conservative estimate. Baranera,
whose figures are believed to be carefully prepared, places
the total at 9,000,000. The extent of territory occupied in
whole or in part by each of the more important civilized
tribes can be estimated with a greater degree of accuracy, and
is approximately as follows: Visayans (occupying 28,100 square
miles) 2,601,600; Tagalogs (15,380 sq. miles) 1,663,900;
Bicols (6,900 sq. miles) 518,100; Ilocanos (6,170 sq. miles)
441,700; Pangasinaus (1,950 sq. miles) 365,500; Pampangas
(1,950 sq. miles) 337,900; Moros (12,860 sq. miles) 268,000;
Cagayans(11,500 sq. miles) 166,300. All of these peoples,
although ignorant and illiterate, are possessed of a
considerable degree of civilization, and, with the exception
of the Mohammedan Moros, are Christianized."

Philippine Commission,
Report, January 31, 1900, volume 1, pages 11-15.

PHILIPPINE ISLANDS: A. D. 1896-1898.

The Katipunan and the rising against Spanish rule.
Appearance of Aguinaldo as a leader.
Dr. José Rizal.
The Treaty of Biac-na-bato.
Departure of Aguinaldo and his return with
the American forces.

The Philippine Islands, discovered in 1521 by Magellan (or

Maghallanes or Magalhaes), and occupied by the Spaniards in
1565, seems, for a long period, to have interested that people
more as a missionary than as a commercial field. Indeed, the
 doings of the church and of the religious orders, and the
acceptance of Roman teachings of Christianity by the greater
part of the native population, make up the essential history
of the Philippines until quite recent times. If the islands
had offered gold mines, or pearl fisheries, or spice forests
to their European discoverers, the story would certainly have
been different. As it was, the Spaniards were not moved to
much eagerness in exploiting such resources of commerce as
they found; and so, through fortunate circumstances, the
natives were made converts instead of slaves.
{370}
By missionaries, more than by soldiers, they were subdued; by
the church, more than by the Spanish state, they were ruled.
It is certain that there were great corruptions and
oppressions in the government, and it follows that a large
share of responsibility for them rests on those who controlled
the affairs of the church. For the past hundred years, at
least, the more spirited part of the native population has
been restive under the misrule and its burdens, and frequent
attempts at insurrection have been made. Such an outbreak in
1872 was suppressed and punished with a vengefulness, in
executions and banishment, which rankled ever afterwards in
the hearts of the people.

A secret society, called the "Katipunan," or League, was then

formed, which became a revolutionary organization, and from
which sprang the most serious of Filipino rebellions, in 1896.
The province of Cavite was the center of revolt, and it was
there that Emilio Aguinaldo, then the schoolmaster at Silan,
came into prominence as a leader. Mr. John Foreman, who was in
the Philippines at the time of the insurrection, states that
Aguinaldo was personally humane, but fearful atrocities were
committed in the first months of the rising by some of the
insurgents of his band. One captured priest, according to Mr.
Foreman's account, "was cut up piecemeal; another was
saturated with petroleum and set on fire; and a third was
bathed in oil and fried on a bamboo spit run through the
length of his body." The Spaniards, on their side, were
equally inhuman in their treatment of captured rebels and
"suspects." Says Mr. Foreman: "About 600 suspects were
confined in the dungeons of Fort Santiago at the mouth of the
Pasig River. Then occurred a frightful tragedy. The dungeons
are below water-mark at high tide; the river filtered in
through the crevices in the ancient masonry; thus twice a day
these unfortunates were up to their waists or necks in water,
according to the height of the men. The Spanish sergeant on
duty threw his rug over the only light and ventilating shaft,
and, in a couple of days, carts were seen by many citizens
carrying away the dead, calculated to number 70. Provincial
governors and parish priests seemed to regard it as a duty to
supply the capital with batches of 'suspects' from their
localities. In Vigan, where nothing had occurred, many of the
heads of the best families and monied men were arrested and
brought to Manila in a steamer. They were bound hand and foot,
and carried like packages of merchandise in the hold. I
happened to be on the quay when the steamer discharged her
living freight, with chains and hooks to haul up and swing out
the bodies like bales of hemp. …

"Thousands of peaceful natives were treated with a ferocity

which would have shocked all Europe. … Within three months of
the outbreak, hundreds of the richest natives and half-castes
in Manila were imprisoned for a few days and released
conditionally"—the condition being a payment of ransom,
sometimes said to be as high as $40,000. But General Blanco,
the then Governor-General, was not vigorous enough in his
measures to satisfy the all-powerful clerical party in the
islands, and he was replaced by General Polaveja, who received
large reinforcements from Spain, and who succeeded in breaking
the strength of the rebellion to a great extent. But the
character of Polaveja's administration is thus described by
Mr. Foreman: "Apart from the circumstances of legitimate
warfare, in which probably neither party was more merciful
than the other, he initiated a system of striking terror into
the non-combatant population by barbarous tortures and
wholesale executions. … Men were escorted to the prisons by
pure caprice and subjected to horrible maltreatment. Many of
them were liberated in the course of a few days, declared
innocent, but maimed for life and forever unable to get a
living. … The only apparent object in all this was to
disseminate broadcast living examples of Spanish vengeance."
The most notable victim at this period was Dr. José Rizal, a
physician, highly educated in Europe, distinguished as an
oculist, and the author of certain novels in which the
condition of things in his native country was set forth. On
his return to the Islands, Dr. Rizal incurred the enmity of
the friars by opposing them, and was pursued by their
hostility. From 1893 to 1896 he was kept in banishment,
closely watched, at a small town in the island of Mindanao.
Then he sought and obtained permission to go to Cuba in the
medical staff of the Spanish army; but, just as he arrived at
Manila, on his way to Spain, the insurrection of 1896 broke
out, and though he was suffered to depart, his enemies pursued
him with accusations of complicity in the rising and caused
him to be brought back. Says Mr. Foreman, who was an
eye-witness of what occurred: "Not a few of us who saw the
vessel leave wished him 'God speed.' But the clerical party
were eager for his extermination. … The lay authorities always
had to yield to the monks, and history herein repeated itself.
Dr. Rizal was cabled for to answer certain accusations, and so
on his landing in the Peninsula he was incarcerated in the
celebrated fortress of Montjuich (the scene of so many
horrors), pending his re-shipment by the returning steamer. He
reached Manila as a state prisoner in the Colon, isolated from
all but his jailors. It was materially impossible for him to
have taken any part in the rebellion, whatever his sympathies
may have been." Nevertheless, he was tried by court-martial
for sedition and rebellion, condemned and shot; and his memory
is cherished in the islands as that of a martyred patriot.
"The decree of execution was one of Polaveja's foulest acts."
 Having scotched but not killed the insurrection, Polaveja went
home, with broken health, in the spring of 1897, and was
succeeded by General Primo de Rivera, who, after some months
of continued warfare, opened negotiations with Aguinaldo, the
recognized leader of the revolt. The result was a treaty,
known as the "Pacto de Biac-na-bato, signed December 14. By
this treaty "the rebels undertook to deliver up their arms and
ammunition of all kinds to the Spaniards; to evacuate the
places held by them; to conclude an armistice for three years
for the application and development of the reforms to be
introduced by the other part, and not to conspire against
Spanish sovereignty in the Islands, nor aid or abet any
movement calculated to counteract the reforms.
{371}
Emilio Aguinaldo and 34 other leaders undertook to quit the
Philippine Islands, and not to return to them until so
authorised by the Spanish Government. On behalf of the Spanish
Government it was agreed to pay, through the medium of Pedro
A. Paterno, to the rebels the sum of $1,000,000, and to the
families who had sustained loss by reason of the war $700,000,
in instalments and conditionally,"—the condition being that no
renewal of rebellion or conspiracy occur. Aguinaldo and other
chiefs of the insurrection left the Islands, accordingly; but
they are said to have been utterly duped. One instalment, only
($400,000), of the promised money was ever paid; the promised
reforms were not carried out, and persecution of those who had
been in sympathy with the rising was renewed.

J. Foreman,
The Philippine Islands,
chapter 26 (New York: Charles Scribner's Sons).

"Aguinaldo and his associates went to Hongkong and Singapore.

A portion of the money, $400,000, was deposited in banks at
Hongkong, and a lawsuit soon arose between Aguinaldo and one
of his subordinate chiefs named Artacho, which is interesting
on account of the very honorable position taken by Aguinaldo.
 Artacho sued for a division of the money among the insurgents
according to rank. Aguinaldo claimed that the money was a
trust fund, and was to remain on deposit until it was seen
whether the Spaniards would carry out their promised reforms,
and if they failed to do so, it was to be used to defray the
expenses of a new insurrection. The suit was settled out of
court by paying Artacho $5,000. No steps have been taken to
introduce the reforms, more than 2,000 insurgents, who had
been deported to Fernando Po and other places, are still in
confinement, and Aguinaldo is now using the money to carry on
the operations of the present insurrection."

F. V. Greene,
Memorandum concerning the Situation in the Philippines,
August 30, 1898 (Treaty of Peace and Accompanying Papers:
55th Congress, 3d Session,
Senate Document Number 62, part 1, page 421.

PHILIPPINE ISLANDS: A. D. 1897.

Refusal of United States Government to negotiate
with the insurgent republic.

See (in this volume)

UNITED STATES OF AMERICA: A. D. 1897 (NOVEMBER).

PHILIPPINE ISLANDS: A. D. 1898 (April-May).

Circumstances in which Aguinaldo was brought to
Manila to co-operate with American forces.

See (in this volume)

UNITED STATES OF AMERICA:
A. D. 1898 (APRIL-MAY: PHILIPPINES).

PHILIPPINE ISLANDS: A. D. 1898 (April-July).

Destruction of the Spanish fleet in Manila Bay.
Blockade and siege of the city.
Co-operation of insurgents under Aguinaldo.
 See (in this volume)
UNITED STATES OF AMERICA: A. D. 1898 (APRIL-JULY).

PHILIPPINE ISLANDS: A. D. 1898 (May-August).

Conduct of English and German naval officers at Manila.

See (in this volume)

UNITED STATES OF AMERICA: A. D. 1898 (MAY-AUGUST).

PHILIPPINE ISLANDS: A. D. 1898 (July-August).

Correspondence between the American commander and Aguinaldo.

This is fully given (showing the relations between the

American and Filipino forces, before the capture of Manila),
in the general account of the Spanish-American War.

See (in this volume)

UNITED STATES OF AMERICA:
A. D. 1898 (JULY-AUGUST: PHILIPPINES).

PHILIPPINE ISLANDS: A. D. 1898 (July-September).

American capture of Manila.
Relations with the Filipino insurgents.
General Merritt's report.
Aguinaldo declared President of the Philippine Republic.

See (in this volume)

UNITED STATES OF AMERICA: A. D. 1898 (JULY-SEPTEMBER).

PHILIPPINE ISLANDS: A. D. 1898 (August).

Suspension of hostilities between the United States and Spain.
Manila held by the former pending the conclusion
of a treaty of peace.

See (in this volume)

UNITED STATES OF AMERICA: A. D. 1898 (JULY-DECEMBER).
PHILIPPINE ISLANDS: A. D. 1898 (August).
Losses of the American army during the war with Spain.

See (in this volume)

UNITED STATES OF AMERICA: A. D. 1900 (JUNE).

PHILIPPINE ISLANDS: A. D. 1898 (August-December).

The state of things following the occupation of Manila
by American forces.
Growing distrust and unfriendliness of the Tagalos.
General Otis's report.

Of the state of things which followed the departure of General

Merritt, August 30, General Otis, who succeeded him in
command, reported subsequently as follows:

"Until October 14 [1898], the United States troops in the

Philippines remained stationed at Manila and Cavite, as
provided in General Merritt's orders of August 23, with very
slight exceptions, Major-General Anderson retaining
supervision of the district of Cavite and Major-General
MacArthur of the troops stationed in Manila, the three
organizations composing the provost guard continuing, however,
under the control of Brigadier-General Hughes. They were most
bountifully supplied with subsistence and medicines, but light
clothing suited to the climate and facilities necessary for
occupying and messing in barracks were needed. These were soon
obtained through contract and purchase from the merchants of
Hongkong and Manila and by shipment from the United States.
The troops received tactical instructions daily, but the
weather was too hot for much physical exertion, and time hung
heavily upon them. They entertained the impression that the
Spanish war had terminated, and the volunteers appeared to
believe that they should be recalled to the United States at
once and regular troops sent out to perform the monotonous
garrison duties which were about to follow the victory of