# Mexico and its reconstruction/Chapter 8

Layout 4
Contents
CHAPTER VIII
MEXICAN FINANCE: PUBLIC INCOME AND EXPENDITURE
As in every other country the means at the disposal of the Mexican government for meeting its foreign and domestic obligations are determined by the natural resources of the country, the economic development of its people, and the taxation system that has been adopted. The latter two elements are capable of gradual changes. Such have occurred and are in process. But neither can be revolutionized with the overthrow of one government and the establishment of another, because each depends upon the development of the factors that precede it—economic development of the people upon the development of the natural resources and taxing practice upon both.
The collection of public revenue in Mexico during the colonial period was not according to any well thought-out plan as to where the burden should lie. There was no taxing system properly so called, but the government merely laid its hands on the sources of revenue from which returns could be secured most easily. Tax collection was haphazard; it affected persons, articles, and places that could be easily reached. Opportunism and not a fair distribution of burden was its guide, and many of the levies were thoroughly uneconomic and ​checked progress even in the lines Spain wished to encourage.
Since foreign commerce did not grow and could not yield heavily, internal commerce was forced to make payments at internal customs houses, which beyond doubt kept back Mexican economic progress.
Nevertheless it is easy to criticize, but hard to see what other method could have been pursued by Spain. Her hold over the country was after all so far from that which under modern conditions is possible, the transportation system was so poor, and the persons upon whom she could rely for honest appraisements and collections so few, and at best so unfitted to deal with the problems that faced the colony, that while all can see that the taxing methods used were unfortunate, it is harder to state what could have been better adopted under the then existing conditions.
There were four classes of taxes in the Spanish régime.
1. Taxes that were sent back to Spain, such as those on quicksilver and tobacco.
2. Special taxes, the tenths, the ecclesiastical subsidy, and a few others of like nature, which were destined to particular uses and not available as general income.
3. Another class was separate incomes known as ajenos. Such were the Pious Funds of the Californias, the taxes on pawn shops, income from prohibited liquors, and certain levies on mining. These were not resources that were covered into the treasury. Some of them were collected, however, by the administrative officers and spent by the government directly. ​4. Finally there were the levies classed as common taxation. They did not differ in nature from the foregoing but they were the source of the public treasury income from which the general colonial expenses must be paid. These taxes themselves fall into classes, those on the production of metals, especially silver and gold, formed an important part of the total. There were taxes on other products, the entry or production of which could be easily controlled such as salt and silk, powder and pulque. Stamp taxes on business documents and many others, paper taxes, anchorage dues, and taxes on commerce for maintaining or building certain fortifications were included in the list. Lotteries were taxed, and there were some unimportant returns from levies on land. Highly important were the alcabalas, the taxes on internal commerce.
When the country won its independence from Spain, the public treasury was empty and private property burdened by the destruction that had occurred during the struggle. Some of the taxes mentioned, especially those in the first classes, were abolished but there was no general reform. The problem continued to be how to get income to run the government, rather than the ideal way in which to get it. Many of the old taxes were continued, although they had long been a source of complaint. Before any comprehensive reform could be put into operation the Mexicans had begun the long series of internecine conflicts that kept them too busy to consider tax laws except as a means of satisfying the immediate needs of the government. In fact, it is not possible to ascertain either the amounts collected or all ​the tax laws that were nominally in force in the period following the winning of independence.
The tobacco tax under the republic went into the national treasury. Stamp taxes were continued, alcabalas remained one of the most important—in some years far the most important—source of revenue. Bullion and pulque taxes were kept up. In general, the old Spanish system was continued, as was to be expected.
A review of the measures adopted to increase the public revenue in the next half century of Mexican history reveals no policy. There were numerous tariffs, some of which declared for developing local industry. Some progress was made in doing so in a few lines. There were scattered efforts to reduce, and later to abolish, the alcabala taxes but revolutions overturned all efforts for financial reform and made revenue of the highest importance at the same time that they made it harder to secure. This, of course, was at the bottom of the repeated default on foreign loan interest payments, already noted, and the reason why independence seemed to outsiders so fruitless of economic and cultural advance.
In fact, the struggle for a sufficient income to pay the foreign debt service and leave a working balance ​for the development of the country extended well into the Diaz régime. When at last order was established, the group in charge of the government gradually came to realize that transportation must be improved if the country was to be put in touch with the outside world and to develop a foreign trade that could assist in putting it on an economically sound basis. The policy of encouraging railroad building was adopted and developmental projects of other kinds were also given public support.
To what extent such plans justify themselves depends on the rapidity with which the country adjusts itself to new conditions. It was far-seeing statesmanship to put off the day when a balanced budget could be secured if a rapid expansion of national economic power could be obtained thereby, but for no nation is it possible indefinitely to cover annual deficits by loans, especially when the interest on such loans is high as is regularly the case in undeveloped regions. Mexico wisely decided to take the risk of increasing for the time being the national obligations in order to increase the national wealth and through it the financial ability of the government.
By the early '90s, when a period of financial stress was affecting the whole continent, the railway mileage had been greatly increased. Subventions had pushed up the obligations of the government and those in power had to consider whether it was not time to wait before contracting further debts until the country should have responded more fully to the stimulus of its new transportation facilities and the resulting contact with the ​outside world. The foreign commerce and the federal income had almost trebled in the 12 years preceding July, 1892, but recurring deficits made conservatism in public expenditure wise. "It is, therefore, indispensable" "to summon the determination to make our budgets balance" declared the treasury officials, "making, on the one hand, all the economies compatible with the necessity of preserving the public and on the other increasing the taxes as far as the crisis through which the nation is passing will permit." "The wise and farseeing public policy indicates the necessity of holding in the granting of subventions. . . and waiting for some time until the horizon clears.
But to secure the advantages made possible by the railroads one important change in taxing policy was seen to be needed even with the adoption of this more conservative program, that was the abolition of the internal customs houses at which were collected the alcabalas. "Whatever apology could be made for such taxation in the colonial era it was now thoroughly indefensible. The constitution of 1857 had done away nominally with taxes of this sort but the various ministers of the treasury had not dared to put the rule into effect. In 1892 the federal treasury was still receiving $2,000,000 from the tax, an income which in the Mexican budget of that time was apologized for because it was "of considerable size, established for several centuries, and ​accepted by the country." Nevertheless the economic inadvisability of continuing the levies, which were such a serious drag on commerce, was so plain that the government undertook their prompt abolition, a move that subsequent experience fully justified.
The federal taxing system underwent but slight modification in the Diaz régime. The increase of income arose not so much from the creation of new taxes as from the increased receipts from old ones. From 1876 to 1892 no changes were made. The sources of income were first and most important the duties on imports and exports. These always have been the greatest contributors to Mexican revenue. Next in importance were the stamp taxes levied on all sorts of business transactions, contracts, sales, receipts, leases, promissory notes, bills of exchange, and the like. These two sorts of taxes together yielded well over four-fifths of the total revenue. Import and export duties alone made up about three-fifths.
Among the minor sources of income the most important were those from such things as lotteries, telegraphs, mines, and the post office. These were about 10 per cent of the entire collections. Direct taxes known as predial, professional, and license taxes yielded about three per cent and the octroi a similar amount. In 1892-3 a few other minor imposts were created by law and later Congresses added a few. To the end of ​the Diaz régime, however, there was no general revision of the taxing system.
In 1902 steps were taken to protect the public revenue against the consequences of fluctuation in the value of silver. The rate of exchange for the foreign debt services was fixed in the years following the greatest fall in the price of silver, 1892-5, to allow gold 100 per cent premium. Silver later went down still further, the premium on gold rising to 150 per cent. The actual income of the country collected in silver shrank proportionately whenever it was necessary to make payments on a gold basis. It was decided, therefore, to reckon the import taxes not in silver, at their face, but in the equivalent of the rate in gold at a fixed exchange rate—220 per cent. The amount of any tax was then reconverted into silver pesos at the prevailing rate of exchange of the day.
The policy of the Diaz government in the management of the financial affairs of Mexico was fully justified by the result. Income finally came to exceed expenditure, and the adjustment of the tariff system removed the effect of the shifting value of silver on the total customs receipts. By the middle '90s the ordinary income showed a good margin above ordinary expenditure, a condition which continued through the rest of the ​Diaz régime. The adoption of the gold standard in 1905 still further stabilized the financial system.
The public finances, however, were still far from a satisfactory condition from a social point of view. The balances were made favorable only by neglect of some of the greatest social needs of the republic. Education was still backward, sanitation, outside the big towns, was poor, and transportation facilities, in spite of the great advance over the pre-railroad period, were still inadequate. The taxes were not adjusted in such a way as to give proper impulse to national industrial development nor to stimulate the exploitation of the country's agricultural resources. A system of land taxation that would fall upon unproductive holding of large estates was still lacking. There was need of a large amount of social legislation so adjusted that the republic would become a truly modern nation throughout her national life. This was a task immensely greater than the financial rehabilitation which the government, under the dictatorship, had so successfully carried out. It was a task in which but little progress had been made and which the government, in spite of the evidence so clearly presented in the reports of many of its officials, had never resolutely faced.
Whether the old régime could have carried through the great socialization program that was needed may be doubted. The dictatorship had not shown itself capable of encouraging the broadening of privileges and ​opportunities even within the small circle of whose who were its servants. There can be no doubt that the failure to face the great humanitarian work, which should have accompanied the economic regeneration of the country, was the greatest weakness of the old régime and the fundamental cause of its spectacular and tragic downfall.
* ↑ A discussion of the tax system under Spain and in the early years of independence is found in Memoria de hacienda y crédito público. . . 1 de Julio de 1910 a 30 de Junio de 1911, Mexico, 1912, p. 210 et seq. See also W. F. McCaleb, The Public Finances of Mexico, New York, 1921, the most detailed review of this field in English.
* ↑ Memoria de hacienda y crédito público. . . 1 de Julio de 1891 to 30 de Junio de 1892, Mexico, 1892, pp. 1-15, contains a discussion of this policy. A balanced budget was secured in 1895, the first since 1822.
* ↑ Ibid., pp. 11-15. See also M. Romero, "Wages in Mexico," published in Commercial Information Concerning the American Republics and Colonies, 1891, Bulletin No. 41, Washington, 1892.
* ↑ A review of the taxing system in the early '90s is found in Luis Pombo, Mexico: 1878-1892, Mexico, 1893, p. 95 et seq.
* ↑ Put in force November 25, 1902, Memoria de hacienda y crédito público . . . de 1 de Julio de 1902 a 30 de Junio de 1903, Mexico, 1907, pp. 7-8.
* ↑ See tabulation in Memoria de hacienda y crédito público, correspondiente al ano económico de 1 de Julio de 1907 a 30 de Junio de 1908, Mexico, 1909, p. 5.