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Candidate Number: 54215 Aurelio Nuño Trinity, 2008-05-19 St Antony’s College

Building a National State “without” Taxation: the Political Consequences of the Fiscal Evolution in Mexico after the Armed Revolution, 1920-1930.

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Table of Contents

Introduction……………………………………………………………………………… 3

I.

Lack of International Wars and Forging a New Internal Coalition……….. 6

II. The Porfirian Fiscal Structure…………………………………………………….. 13

III. The Obregón Presidency: Limits and Possibilities of Fiscal Extraction …17

IV. The Calles Presidency: Political Coalitions and Low Taxation…………….36

Conclusion……………………………………………………………………………….47

Bibliography……………………………………………………………………………. 50

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Introduction After the armed period of the Mexican Revolution (1910-20), there emerged “in the 1920s and ‘30s, a regime that proved more durable than Don Porfirio’s and an economy that, over time, eclipsed both its Porfirian predecessor and its Latin American rivals”.1 In that sense, as Alan Knight argues, the Mexican Revolution displayed “a distinctly Tocquevillean character: from the rubble of revolution was built a state both stronger and more stable than its old regime counterpart”.2 Nevertheless, this stronger and more stable state did not create a solid fiscal system. The revolutionary governments of the 1920s collected, as percentage of GDP, almost the same revenue as the late Porfirian regime did. Moreover, in comparative perspective, Mexico’s low levels of taxation were maintained during the entire twentieth century.

Why did a stronger and more stable state not create an extensive fiscal system? Furthermore, how was it possible to create a stronger state without a solid fiscal system? What was the nature of the fiscal system forged after the armed Revolution? What were the political consequences of this new fiscal arrangement?

My first hypothesis is that the combination of the nature of the internal challenges of state reconstruction with the lack of a serious threat of any international war against powerful states3 demanded a not-very extensive fiscal

1

Knight, Alan, “The Peculiarities of Mexican History: Mexico Compared to Latin America, 1821 -1992, in Journal of Latin American Studies, Vol. 24, 1992, p. 104. 2 Ibid, p. 104.
3

Until the end of the 1920s the threat of an US invasion was present. Yet, my contention is that the military superiority of the US was so evident that ironically it was no longer a real military threat.

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structure. Furthermore, my second hypothesis, and the central argument of this paper, is that the internal conditions that shaped the process of state reconstruction in Mexico after the Revolution not only failed to create pressure for increased taxation but also created strong incentives to avoid taxation.

The strength of the new regime came from the formation of a broad coalition between the government and different sectors of the Mexican society. My contention is that one of the elements that helped the government to forge this coalition was offering low tax rates and fiscal waivers in exchange for political support. This process of coalition formation shaped a fiscal system full of waivers, privileges, and tolerated evasion that also reinforced a pattern of clientelistic politics.

The present work confines itself to the 1920s, a period where the Mexican state experienced a rapid and radical process of reconstruction that shaped the nature of the new regime. This essay is divided into four parts. In the first part I develop my hypotheses and central arguments. In the second part I describe the main features of the Porfirian fiscal system that was inherited by the revolutionary governments of the 1920s. In the third part, I analyse the possibilities of and the limitations on taxation faced by the government of Álvaro Obregón (1920-24), including the oil boom, the lack of both international and

Furthermore, in terms of territory, the US, during the Mexican-American war (1846-48), had already taken what it wanted from Mexico, thus by the 1920s a potential US invasion, such as the occupation of Veracruz in 1914, did not put at risk the future of the country. A hypothetical invasion would only be a temporary occupation of some ports and oil fields. Furthermore, after Mexico defeated France in 1867, the risk of a European invasion disappeared and the other Mexican neighbors, Belize, Guatemala and Cuba, were not a military threat. In a nutshell, since 1867 Mexico no longer had a security dilemma. For the concept of security dilemma see, Herz, John, Political Realism and Political Idealism: A Study in Theories and Realities, (Chicago: Chicago University Press, 1951).

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national loans, the Obregón’s failed attempts to create direct taxes and finally the imposition of the income tax after the delahuertista uprising (1923-24). Finally, in the fourth part, I analyse how the offer of low taxation and fiscal waivers helped to consummate, during the Plutarco Elías Calles presidency (1924-28), the political coalitions that gave the new regime its strength and stability.

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I. Lack of International Wars and Forging a New Internal Coalition

The revolutionary governments between 1920 and 1930 collected, on average, 5.85% of Mexico’s GDP. This was just a small increase compared to the late Porfiriato, which between 1900 and 1910 had on average collected 5.35%. By any international comparison this figure was very low. For instance, during the 1920s the UK government collected 19% of GDP, the US 13%, Brazil 9%, and Argentina 6.5%. Furthermore, in comparative perspective, Mexico’s low levels of taxation were corrected neither during the 1930s nor indeed during the entire twentieth century.4
Figure 1: Central Governments Revenues as percentage of GDP
Central Governments Revenues as a percentage of GDP
45

40

35

30 Mexico UK US Brazil Argentina

% of GDP

25

20

15

10

5

0 1910 1920 1930 1940 1950 Year 1960 1970 1980 1990 2000

Sources: For Mexico, Brazil and Argentina, Oxford Latin America Economic History Database: http://oxlad.qeh.ox.ac.uk. For UK from 1910 to 1970, Aboites, Excepciones y privilegios, p. 397 (Cuadro A2), from 1970 to 2000, OECD, Revenue Statistics. For US from 1910 to 1950, US Department of the Treasury, “Fact sheets: Taxes. History of the US Tax System”: www.treasury.gov/education/fact-sheets/taxes/ustax.shtml, from 1950 to 1970, Aboites, Excepciones y privilegios, p. 397 (Cuadro A2), and from 1970 to 2000, OECD, Revenue Statistics.
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Percentages for Mexico, Brazil and Argentina were calculated using the Oxford Latin America Economic History Database: http://oxlad.qeh.ox.ac.uk. For UK percentages see Aboites, Excepciones y privilegios. Modernización Tributaria y Centralización en México, 1922-1972, (México: El Colegio de México, 2003), p. 397 (Cuadro A2). For US percentages see US Department of the Treasury, “Fact sheets: Taxes. History of the US Tax System”: www.treasury.gov/education/fact-sheets/taxes/ustax.shtml.

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Charles Tilly argues that state construction in Western Europe was the result of interaction between the clash of expansionist political groups, which led to wars, extraction of resources in preparation for such wars, and the internal constraints of tax extraction that were determined by the configuration of class structure.5 In a nutshell, wars made states and states made wars. 6 From this perspective, the origins and the evolution of the fiscal structures of the Western European states were a consequence of war. The relationship between war and taxes was very clear during the World Wars. For instance, in 1910 the UK only collected around 7% of its GDP, yet after the First World War UK revenues reached 20% of the GDP. Before the Second World War UK revenues were somewhat less than 20% of its GDP, but after the war revenues were higher than 35%.7 A similar process was experienced by the US. During the First World War, federal revenues increased 300% in terms of GDP, and during World War II revenues increased 150%.8

Clearly the Mexican Revolution did not have the same effect on the fiscal structure. As Centeno argues, not all wars have a positive influence on taxation.9 The principal difference between the Mexican Revolution and the European wars, especially the World Wars, was that the former was fought among internal factions, none of which was constituted by political structures with the organizational abilities that characterize European nation-states, and
5

See, Tilly, Charles, Coercion, Capital, and European States, AD 990-1992, (Oxford: Blackwell Publishers, 8th edition, 1998), pp. 1-37. 6 Ibid, pp. 67-95. 7 See, Aboites, Excepciones y privilegios, p. 397 (Cuadro A2). 8 See, US Department of the Treasury, “Fact sheets: Taxes. History of the US Tax System”: www.treasury.gov/education/fact-sheets/taxes/ustax.shtml. 9 See, Centeno, Miguel Ángel, Blood and Debt. War and the Nation-State In Latin America, (Philadelphia: The Pennsylvania State University Press, 2002), p. 104.

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they required less material resources than the wars fought by the latter. Winning the Mexican Revolution required fewer resources than winning World War I.

During the period of state reconstruction in the 1920s the new regime was not a centralized state searching for revenue to fight another powerful state. On the contrary, it was a weak state that had inherited a poor fiscal system trying to establish its internal authority over uncontrolled generals and local political bosses. Therefore, on the one hand, the revenue needed by the state to defeat internal dissidents, who also had only limited access to revenues, was less than that needed to defeat a powerful foreign enemy. On the other hand, precisely the fact that the central government was not yet able to monopolize the means of violence limited its possibilities of extracting revenue. Geographical and economic conditions, such as the lack of infrastructure and capital, as well as the extension of the territory, mountainous areas, and few navigable rivers, complicated the possibilities of raising taxes even more. Therefore, the combination of the internal challenges of state reconstruction with the lack of a serious threat of any international war demanded a not-very extensive fiscal structure.

The new regime was immersed in an environment crowded by uncontrolled generals and well-mobilized popular organizations, who, if not allies of the government could be co-opted by military rebels. Therefore, the government was very soon forced to forge political coalitions with some of the most powerful factions of different, even contradictory, social and economic groups, for the fear that it might be overthrown by military dissidents.

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Yet the central problem was that the new regime had inherited a very weak fiscal structure, and the material benefits that it could offer to its allies were also very restricted. Under these circumstances, one of the most valuable resources that the government was able to offer or, from another perspective, was forced to offer in exchange for political support was not to tax, or to tax its allies very little. Indeed, as I attempt to demonstrate in the following pages, one of the key components that allowed the new regime to build a broad coalition among peasants, workers, capitalists, and local political bosses, and therefore to construct a stronger and more stable state than its old regime counterpart, was the establishment of very low taxes or even the full exemption of tax payments to the regime’s allies.

Another element that helped the new regime to forge a coalition without spending heavily was the fact that both land reform and organized wor kers’ demands could be achieved without exorbitant expenditure. The new Constitution of 1917 (especially article 27), combined with the Sonorans’10 military victory, opened the door to the distribution of some of the land owned by Porfirian hacendados. The revolutionary government had seized or could potentially seize some of the land. Land reform cost money, especially because it demanded new bureaucratic organizations, but it was cheaper than other social benefits and rights such as health and education might be, especially after a revolution where land had been seized by force. Also, in the case of

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The clique of revolutionary Generals who overthrew President Carranza in 1920 under the Plan de Agua Prieta were commanded by three Generals from the state of Sonora in North West Mexico: Álvaro Obregón, Adolfo de la Huerta and Plutarco Elías Calles. The presidential periods of Obregón and Calles (1920-28) is therefore also known as the “Sonoran regime”.

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organized workers the Constitution (especially article 123) and military triumph gave the government the ability to force entrepreneurs to meet workers demands, thus transferring a significant proportion of the cost of social reform to capitalists. Military victory in itself brought a significant change in power relations.

Low tax rates and tax waivers did not fully exempt the government from rewarding some of its allies with material benefits. For instance, bringing the army under government’s control and buying generals’ loyalty with cash was expensive. The Confederación Regional Obrera Mexicana (CROM), the principal workers’ organization allied with the govern ment, also demanded patronage, and a number of big landlords, some of them revolutionary generals, benefited from irrigation systems paid for by the government. Therefore, because revenues were limited, the coalition was also limited. Furthermore, precisely because one of the “glues” of the government’s coalition was low taxation, the government had very limited options when it came to raising more money in order to expand the government’s benefits to more people and enlarge its coalition.

It was for these reasons that there emerged a pattern of selective rather than universal enforcement of property, social, legal and political rights and other economic benefits delivered by the government, thus reinforcing a process of political and economic articulation through clientelism. Moreover, precisely because the government did not have enough revenues to sustain itself without its clientelistic alliances, dissenters among the excluded groups threatened the

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government’s survival, and a pattern of repression of d issenters took shape in the 1920s.

From the perspective of the New Institutional Economics (NIE)11, Haber, Razo and Maurer12 explain that economic growth during both the armed Mexican Revolution and the unstable period of state reconstruction of the 1920s was possible because of the formation of coalitions such as those described in this essay. They argue that the government selectively enforced the property rights of asset holders who joined the government’s coalition. Therefore, those asset holders were secure in the knowledge that their properties and investment would not be affected by the government. They were therefore able to invest, and some degree of economic growth was achieved.

Haber, Razo and Maurer call these forms of coalitions Vertical Political Integration (VPI). Governments are interested in creating VPI coalitions because they get revenues in exchange for enforcing the property rights of the asset holders who are members of the government coalition. While I agree with the analysis of how VPI coalitions worked in Mexico during the 1920s, the analysis of Haber, Razo and Maurer actually supports my hypothesis that low taxation was conceded in exchange for support, since they argue that one of the mechanisms of selective protection of property rights was preferential tax treatment. But from my perspective, these authors, for the case of Mexico in the
11

“The NIE is a development of neo-classical economics to include the role of transaction costs in exchange and so to take account of institutions as critical constrains on economic performance”, see, Harris, John, Janet Hunter and Colin M. Lewis, The New Institutional Economics and Third World Development, (London: Routledge, 1995), p. 3. 12 See, Haber, Stephen, Armando Razo and Noel Maurer, The Politics of Property Rights. Political Instability, Credible Commitments, and Economic Growth in Mexico, 1876-1929, (Cambridge: Cambridge University Press, 2003).

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1920s, overestimate the government’s interest in taxation. Obviously, the Mexican government was interested on getting some revenues from its allies, but it was even more interested in political support. Therefore, it displayed a strategy of achieving political support in exchange of low taxation, a formula that helped the revolutionary regime to build its success.

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II. The Porfirian Fiscal Structure

The Porfirian fiscal structure was based on indirect taxes. The three most important sources of revenue were custom taxes, stamp tax, an indirect tax on internal trade and transactions, and taxes on public services and exploitation. The only direct tax during the Porfiriato was the property tax collected by municipalities. However, the big landowners did not pay this tax fully, especially during the late Porfiriato, and they normally reported lower values for their properties and lobbied to get fiscal reductions and waivers.13

Custom revenues were the principal source of central government revenue during the Porfiriato, but when measured as percentages of total revenue tended to show a decrease, while stamp tax, the second most important revenue, tended to show an increase. This was an important shift in the structure of the Porfirian finances. In 1876, at the beginning of the Porfirian regime, custom revenues were 66% of federal revenues, the stamp tax only represented 11% of central government revenues and taxes on public services and exploitation were 23%. Fiscal dependency on foreign trade was remarkable. Yet in 1910, at the end of the Porfiriato, custom revenues were 44% of federal revenues, while the stamp tax represented 30%, and taxes on public services and exploitation were 26%. Internal taxes had become more important than external taxes.

13

For the case of hacendados in Morelos see Womack, John, Zapata and the Mexican Revolution, (New York: Vintage Books, 1970), p. 42. For the case of Chihuahua see, Katz, Friederich, The Life and Times of Pancho Villa, (Stanford: Stanford University Press, 1998), pp. 50 and 129-130.

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Figure 2: Evolution of the Porfirian Fiscal Structure, 1876-1910

Evolution of the Federal Revenues' Composition, 1876-1910
70

60

% of Total Federal Revenues

50

40 Customs Stamp Tax Public Services and Eploitation

30

20

10

0 1876 1880 1885 1890 Year 1895 1900 1905 1910

Sources: Cárdenas, Enrique, Cuando se originó el atraso económico de México. La economía mexicana en el largo siglo XIX, 1780-1920, (Madrid: Editorial Biblioteca Nueva, 2003), pp. 15455 (Cuadro V.3). And Cosío Villegas, Daniel, La cuestión arancelaría en México, vol. III, (México: Centro Mexicano de Estudios Económicos, 1932?), pp. 70-71 (Cuadro 6).

Two factors explain the growth of internal taxes. First, the growth of the economy, and in particular the expansion of domestic trade related to the rapid growth of railway construction,14 stimulated an increase in internal taxes. Second, in 1893 the Minister of Finance, José Ives Limantour, implemented a

14

See, Cárdenas, Enrique, Cuando se originó el atraso económico de México. La economía mexicana en el largo siglo XIX, 1780-1920, (Madrid: Editorial Biblioteca Nueva, 2003), pp, 142-51, and 157. See also, Knight, The Mexican Revolution, vol I, (Lincoln: University of Nebraska Press, 1990), pp. 80-1.

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fiscal reform raising the tariffs of the stamp tax on textiles, alcoholic beverages, and property transactions.15

During the late Porfiriato, between 1900 and 1910, on average the federal government raised 5.35% of the Mexican GDP, a relatively low figure compared with Brazil and Argentina, two countries with a similar degree of development. Brazil, on average, collected 12.7% of its GDP and likewise Argentina raised 7.3% of its GDP.

Figure 3: Central Governments Revenues as a percentage of GDP, 1901-1919
Central Governments Revenues as a percentage of GDP, 1901-1919
16

14

12

10 Mexico Brazil Argentina
GDP %

8

6

4

2

0 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 Year

Source: Oxford Latin American Economic History Database.

15

See, Cárdenas, Cuando se originó el atraso, pp. 156-7.

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From the second half of the 1900s Mexican revenues declined as a percentage of GDP. By 1910, when the Mexican Revolution started, federal revenues were only 3.7%. This level was maintained until 1919. The Revolution might have had some influence on this decrease. Nevertheless, is important to notice that both Brazilian and Argentine revenues also declined during this period. Between 1910 and 1920 the former collected, on average, 10% of its GDP, and the latter 5.5% of its GDP. Therefore, it is not unrealistic to think that some other factors might also have influenced the decline in revenues.

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III. The Obregón Presidency: Limits and Possibilities of Fiscal Extraction

On 1 December 1920, after the brief interim presidency of Adolfo de la Huerta, Álvaro Obregón was sworn in as president. His government inherited the fiscal structure developed during the Porfirian regime. This meant that the Mexican federal government continued to depend on indirect taxes, and there was no federal direct tax. There were, however, two key structural differences between the Porfirian and “Sonoran” financial systems. Obregón not only inherited the Porfirian fiscal structure but also the monetary chaos created by the Revolution16 and the lack of both international and national credit. These two phenomena were new. The Porfirian regime had access to international credit and there was not a fragmented monetary sovereignty as there was during the armed Revolution.

Payment of the external debt had been suspended since 1914 and international loans had therefore been also cancelled. President Venustiano Carranza (191720) ordered the confiscation of the assets of the Mexican banks, forcing them to finance his government, yet when Obregón took power the capital seized by Carranza had gone.17 Consequently, the national banks had no capital to borrow, and after the inflationary experiences and destruction of the banking system during the Revolution, the government knew that a strategy of printing money without the proper support of gold reserves would only worsen the economy. Furthermore, the government did not even have enough instruments

16

See, Medina Peña, Luis, Hacia el Nuevo Estado. México, 1920-1994, (México: Fondo de Cultura Económica, 2000), pp. 85-87. 17 See, Zebadúa, Emilio, Banqueros y revolucionarios: la soberanía financiera de México, 1914-1929 (México: Fondo de Cultura Económica and ColMex, 1994), p. 166.

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of monetary policy to implement fully the inflationary policy of printing money.18 There was no central bank, and the monetary chaos of the Revolution reduced people’s confidence in government money. Gold and later silver coins were Mexico’s primary circulating medium.19 In a nutshell, neither printing money nor loans nor budget deficits were an option.

Under these circumstances, the only possible source of revenue was the Mexican economy itself. Yet Obregón was very lucky because the production and exporting of oil boomed in 1919. Between 1919 and 1920 oil production achieved an unprecedented increase: the value of crude oil grew 97%. The growth of oil production and exports had a very positive impact on federal revenues, and from 1919 to 1920, federal revenues increased by 31.5% as a percentage of GDP. However, government revenues were still very limited, and tax revenues raised by the Mexican government in 1920 were 5% of its GDP. By contrast, in the same year the UK government, for instance, collected more than 20% of GDP and the Brazilian central government extracted more than 9%. Mexican fiscal capacity was more similar to Argentina’s, which was 5.4% of GDP. Nevertheless, the Argentine government had not been obliged to face a mobilised country after ten years of Revolution.

18

According to Enrique Cárdenas the Mexican government did not develop effective instrument of monetary policy until the great depression of 1929. See, Cárdenas, Enrique, La hacienda pública y la política económica, 1929-1958, (México: Fondo de Cultura Económica y ColMex, 2005), pp. 62-9. 19 See, Noel, Maurer, The Power and the Money. The Mexican Financial System, 1876-1932, (Stanford: Stanford University Press, 2002), pp. 161-70.

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Figure 4: Central Governments Revenues as a percentage of GDP, 1917-1930
Central Governments Revenues as a percentage of GDP
12

10

8

6

Mexico Brazil Argentina

GDP %

4

2

0 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 Year

Source: Oxford Latin American Economic History Database.

When Obregón took power his government did not have US, British, or French recognition. The foreign debt was around 1,000 million pesos, more than 300 million pesos in overdue interest, and the federal government had a surplus in revenue – from oil revenues - amounting to 3 million pesos for the year.20 The Mexican army of some 100,000 men absorbed almost 50 per cent of the budget and, although temporarily supporting Obregón, was not wholly loyal to the president, as was demonstrated three years later when, following Adolfo de la Huerta’s uprising, more than half the army rebelled.

20

See, Womack, John, “The Mexican Revolution”, in Bethell, Leslie (ed), Mexico since Independence, (Cambridge: Cambridge University Press, 1991), p. 200.

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The government also had to deal with a national confederation of labour at odds with the railway union; a still largely landless peasantry demanding land; national confederations of merchants and manufacturers; powerful local political bosses scattered all over the country; and large foreign companies wanting to remain above Mexican law by running their enterprises as enclaves of their own nations within Mexican territory.21

Although oil revenues were helpful the challenges were huge. On the one hand, the government had to bring the military under its control, distribute land among mobilised peasants, and attend to the demands of organized workers, especially to those of its new ally, the Confederación Regional Obrera Mexicana (CROM). On the other hand, the government needed more fresh cash to meet these obligations. The Sonorans needed urgently therefore to re-establish both international and national credit, but a sine qua non for recovering credit was both the government’s ability to pay external debts and the restitution of the national banks’ assets.

Obregón could not wait for further resources to start the process of controlling the army, distributing land and attending to workers’ demands. He had to do all of these at the same time, otherwise his government risked being overthrown by an alliance of dissidents, generals, peasants, workers, entrepreneurs or landowners. It was for this reason that he started to attend to everything at once.

21

See, Womack, “The Mexican Revolution”, p. 200.

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Fortunately for Obregón, as was argued previously, both land reform and the most basic workers’ demands could be met without spending too much money. Consequently, Obregón commenced his agrarian reform immediately. In December 1920, less than a month after he took office, he signed the Ley de Ejidos. This law was the first attempt to regulate some of the principles laid down in Article 27 of the Constitution. As Simpson argues, this law was confused, vague and incomplete, but it demonstrated Obregón’s desire to accelerate agrarian reform and forge a political coalition with the agraristas. 22

A year before, Obregón had forged a durable alliance with the CROM. In a secret pact, the CROM promised to mobilise support for Obregón in the 1920 presidential election, in exchange for privileged political resources and support for the CROM against the capitalists. In the same year, the CROM founded the Mexican Labour Party (PLM), which was a key ally of both Obregón and Calles in their fights against governors within Congress.23

In contrast to the relatively cheap implementation of land and labour reforms, bringing generals under government’s control was more expensive. The strategy followed by the Sonorans of demobilising the military took four forms: helping high-ranking officers to become entrepreneurs, reforming the internal structure of the army, creating agrarian and workers’ militias in order to counterbalance the generals’ military power, and buying the generals’ loyalty with cash. All these actions demanded resources. A huge share of the budget
22

See, Simpson, Eyler, The Ejido. Mexico’s Way Out, (Chapel Hill: The University of North Carolina Press, 1937), p. 81. 23 See, Middlebrook, Kevin, The Paradox of Revolution. Labor, the State and Authoritarianism in Mexico, (Baltimore: The Johns Hopkings University Press, 1995), p. 75.

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was expended on the military. During the Obregón’s presidency, on average, the military expenditure was 45% of the federal budget. For the presidential period of Calles it declined to 31%.24

To sum up, at the beginning of Obregón’s government budgetary pressures were relatively high, and he needed to search for more revenue. Obregón had three options: to increase indirect taxes, to create direct taxes, or to achieve agreements with international and national financiers in order to re-establish credit. He did indeed try all of them.

In order to increase indirect taxes the government had three options: to augment the stamp tax, to impose revenue-maximizing import and export tariffs, and/or to extract a higher share of oil revenues. The stamp tax was problematic. It had many different tariffs and its collection and administration were expensive. The stamp tax also represented to some extent the unpopular side of the Porfiriato. Both the government and the entrepreneurs were against this tax,25 and it was therefore not an option.

Imports tariffs were lowered during the Carranza government, in an attempt both to diminish the hyperinflationary prices caused by the monetary chaos of the Revolution, and to bring in food and other products that were in short supply in some regions of the country owing to the armed Revolution.26 From the

24

See, Wilkie, James, The Mexican Revolution: Federal Expenditure and Social Change since 1910, (Berkley: University of California Press, 1967), p, 102 (Table 5-2). 25 See, Aboites, Excepcione y privilegios, pp. 66-67; and Collado, María del Carmen, Empresarios y políticos, (México: INEHRM, 1996), p. 182. 26 See, Haber and et al, The Politics of Property Rights, pp. 140-41; and Collado, Empresarios y politicos, pp. 202 and 204.

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beginnings of his government Obregón was pressed by industrialists to increase imports tariffs in order to recover the protectionist policy that they had enjoyed during the Porfiriato.

Protective import tariffs are not designed to generate tax revenue, because the effect of those tariffs is to drive imports down to zero or at least to very low levels.27 At the beginning of the Obregón presidency the coalition between the government and the industrialists was at an incipient stage, so Obregón did not yet feel under any obligation to satisfy the industrialists’ demands. As a result, import tariffs increased by only 10%.28 Indeed, the government was able to increase its revenues from imports by a small margin. But while as the alliance between the government and the industrialists was taking shape, import tariffs increased, and government revenues from imports decreased.29

Extracting more revenue from oil was very tempting. Fiscal extraction from the oil industry is relatively easy. Production and exports can easily be monitored by governments, and it is difficult to hide profits. Furthermore, the physical collection of taxes is also straightforward, as oil production and its producers are geographically concentrated rather than dispersed. Moreover, the oil industry has fixed assets, and high levels of investment are required before profits start to be received. In short, the oil industry cannot emigrate in order to avoid highly taxation. Negotiations over the extraction of resources are confined to a small group of protagonists, meaning that when oil production is high,

27 28

See, Haber and et al, The Politics of Property Rights, p. 140. Ibid, p. 142. 29 See, Ibid, pp, 151-54.

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taxing it is very good business. Obregón did not hesitate to augment oil revenue.

Nonetheless, at that moment, the situation was more complicated than that because the government had little power over the oil companies. Oil production was dominated by a few foreign companies, the majority of which were from the US and were backed by the US government. They therefore had the ability to act collectively and with the support of a very powerful government. Furthermore, US diplomatic recognition of Obregón’s government was conditional on respect for the oil producers’ assets, and the government did not yet have the ability to run the oil industry by itself. Any attempt to take over the industry would have caused a temporary but significant disruption in output of oil and therefore in tax collection.30 In a context where some powerful generals were waiting for an opportunity to seize power, the government could not afford the luxury of disrupting oil production.

To complicate the picture even more, the re-establishment of the government’s credit was connected with oil revenues, as extracting more of the latter was one of the fastest ways of obtaining huge quantities of fresh cash. Because of this, both the re-establishment of the national banks’ assets and the repayment of the external debt depended on the government’s ability to extract oil revenues. What was more, US diplomatic recognition was also conditional on a resumption of debt payments. Therefore, extracting oil taxes, reaching an agreement with Mexico’s creditors, and achieving diplomatic relations with the

30

See, Ibid, pp. 191-92.

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US were all part of the same complex problem: how to extract more revenue without affecting the oil companies’ privileges.

Within this context oil producers fiercely resisted any attempt at taxation. Yet Obregón had an important tool with which to put pressure on oil companies. Article 27 of the 1917 Constitution granted the “nation” (in practice the federal government) ownership of all the subsoil of the Mexican territory, including all the minerals that formed part of that subsoil. Foreign oil companies opposed this legislation, sought the protection of the US government in order to retain their property, and blocked the enforcement of article 27 quite effectively. Yet the threat of its enforcement gave leverage to government power over the oil companies, enabling the former to extract a greater share of revenue from the latter.

However, the increment in revenue was not achieved without confrontation. On 7June 1921, Obregón imposed a new oil export tax: a specific duty of from 1.55 to 2.50 pesos per cubic meter of petroleum, assessed in addition to Carranza’s export tax.31 The oil companies responded by curtailing output and stopping all investment. Exports went from 15 million barrels per month to less than 6 million, and employment in the oil fields fell from 50,000 men to 20,000. After their confrontation with Obregón the companies reached an agreement: the Mexican government secured an increase in oil revenues, but the companies obtained a 60% reduction in Obregón’s new export tax.32

31 32

See, Ibid, p. 208. Ibid, pp. 208-9.

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Despite all the difficulties and the clear limitations on the government’s power over the oil companies, extraction of oil revenues was the favourite and most efficient revenue-producing strategy between 1920 and 1924. The significant increase of oil production after 1919 was used to increase on both federal tax revenues and the percentage of oil revenues in the federal income. In fact, the fiscal strategy of the government was shaped by the availability of oil revenues.

Figure 5: Oil Revenues and Oil Production
Oil Revenues as a Percentage of Total Revenues and Oil Production in Millions of Barrels
35 250

30 200 25
Millions of Barrels

% Total Revenue

150 20

Oil Revenues (% of Total Revenues) Oil Production (Millions of Barrels)

15 100

10 50 5

0 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 Year

0

Sources: Oxford Latin American Economic History Database; Meyer, Jean, “Revolution and Reconstruction in the 1920s”, in Bethell, Leslie, Mexico since Independence, (Cambridge: Cambridge University Press, 1998), p. 224 (Table 3); and Haber, Stephen, Armando Razo and Noel Maurer, The Politics of Property Rights. Political Instability, Credible Commitments, and Economic Growth in Mexico, 1876-1929, (Cambridge: Cambridge University Press, 2003), p, 199 (Table 6.1).

26

Oil revenues allowed the Mexican government to restore assets to the national banks in 1921 and to reach an agreement with Mexico’s international creditors in 1922. The payment of the Mexican debt was directly tied to oil revenues: in fact part of the debt was directly paid by oil companies, and such payments were discounted from their taxes.33

Nevertheless, revenues were not bountiful enough to create the much-needed central bank. Therefore, although internal credit was restored after the payment of the internal debt, Mexican banks had very limited credit capacity. Without a central bank, and with a weak national financial system, the possibilities of obtaining significant internal loans continued to be extremely limited. Furthermore, what was known as the de la Huerta-Lamont agreement with international bankers did not include any loan. Negotiations were exclusively concerned with arranging a formula for the payment of the external debt. Although the Mexican government asked for a new loan, international creditors refused it, arguing that Mexico had first to show its payment capacity. So despite fiscal efforts to restore access to credit, Obregón did not enjoy any significant loan, and his government was highly dependent on oil revenues. When oil production declined, the government was forced to search out other sources of revenue.

To impose direct taxation is a huge challenge. The straight extraction of people’s wealth is not the same as indirect extraction of trade. As Tilly argues, taxing people’s own profits, properties or income requires a much more

33

See, Zebadúa, Banqueros y revolucionarios, pp. 182-222.

27

extensive surveillance apparatus for collection than does the collection of revenue from goods passing across borders, which itself gives rise to a larger collection surveillance apparatus than the sale of precious minerals. 34 For instance, even property tax, probably one of the “easiest” direct taxes to collect (because by definition assets are fixed and it is relatively easy to assign them a value) requires long and arduous administrative efforts in order to make a cadastral survey. In France, for instance, it took thirty eight years to complete such a survey.35

Direct tax extraction, at least in the long run, can force governments to negotiate with large numbers of people, rather than relatively few groups of exporters or entrepreneurs as is the case with international trade tariffs or specific taxes of mineral or other industrial production. These negotiations can sometimes drive governments to concede rights and official representation to the people they are extracting resources from.36 It is not accidental that, if they have alternatives, governments normally prefer to avoid direct taxes. Moreover, when capital is abundant, as Tilly argues, taxation is relatively easier and less violent than when capital is scarce.
37

In the Mexico of the 1920s, capital was

not abundant. Therefore, any attempt to extract people’s direct resources beyond the urban centres where capital was normally concentrated, would have

34 35

Tilly, Charles, Democracy, (Cambridge: Cambridge University Press, 2007), p, 202. See, Deas, Malcolm, “The Fiscal Problems of Nineteenth-Century Colombia”, Journal of Latin American Studies, Vol.14, part 2, November, 1928, p. 287. 36 See, Tilly, Charles, Coercion, Capital, and European States, pp. 96-126; and Tilly, Charles, “Where Do Rights Come From?, in Skocpol, Theda, Democracy, Revolutions and History, (New York: Cornell University Press, 1998), pp. 61-63. 37 See, Tilly, Coercion, Capital, and European States, pp. 16-20; 87-89, and 132-43.

28

implied that even stronger state mobilization and coercion were needed, and could have caused unnecessary local rebellions.38

It was these complications, combined with the availability of oil revenues and the political context, which shaped the pattern of direct taxation during the 1920s. As noted before, Obregón tried to open up all possible alternatives in order to expand Mexican revenues. Yet, very soon, political reality and his pragmatism delimited the options.

Obregón’s first attempt to establish a direct tax was the imposition of the Centenario tax, in 1921. This tax was a kind of income tax, because it levied profits and personal income. Yet, from the start, the government explained that the Centenario tax was only a provisional measure, and would be levied just once. Although the aim was to invest in port infrastructure and buy merchant ships, this tax was strongly opposed. Industrialists and merchant organizations criticized it fiercely, and their first reaction was to announce that they would not pay the tax.39 According to Zebadúa, because of the protest against the Centenario tax, this tax was derogated almost immediately after the budget for 1921 was presented to Congress.40 In any case, at that moment oil revenues were 23% of the federal budget. From 1920 to 1921 oil revenues grew by 17%, and expectations of growth in oil revenues were very high. Under these circumstances it made sense not to defend the Centenario tax.

38

One of the multiple reasons for rebellion during the Revolution in central north Mexico was the state penetration and taxation of relatively autonomous towns in the region of Sierra Madre. See, Knight, The Mexican Revolution vol I, pp. 121 and 155. 39 See, Collado, Empresarios y políticos, pp. 164-66. 40 See, Zebadúa, Banqueros y revolucionarios, p. 160.

29

The second attempt to impose a direct tax also failed. On 11 October 1922 a presidential decree, based on the extraordinary faculties that Congress gave to the president on fiscal affairs in 191741, established a federal tax on property. The most active opposition came from the National Agrarian Chambers and governors, though industrialists and merchants also expressed their

disagreement. 42 The opposition, particularly the governors, argued that that the tax was illegal because, according to their interpretation of the Constitution, property taxes were only under state jurisdiction.43 The federal government argued that the tariff was very low (1% of properties’ value), and that the real purpose of the tax was to create a reliable cadastral census.

On 30 May 1923 the decree regulations were published and protests intensified. The government agreed to convoke a national cadastral convention to discuss and negotiate the issue, and at that moment the federal government did not feel under huge pressure to collect more revenue. After all, in 1922 oil revenues were 31% of federal income, having growing by 35%. That year federal revenues reached 6% of Mexico’s GDP. It represented a growth of 20% in only two years. And although oil production started to decline in 1923, this trend was not at all clear during the first semester of 1923. The convention was scheduled by the beginning of December.

41

Between 1917 and 1946 Mexican presidents used those faculties to enact 92% of the fiscal disposition. See, Weldon, Jeffrey, “El crecimiento de los poderes metaconstitucionales de C árdenas y Ávila Camacho. Su desempeño legislativo 1934-1946”, Diálogo y Debate de Cultura Política, 1 (abril-junio), 1997, pp. 24-25. 42 See Collado, Empresarios y políticos, p. 116. 43 The governors argued that following the logic of articles 117 and 118 of the Constitution that forbade states to impose indirect taxes, the federation should be forbidden to impose direct taxes. The same argument was used against income tax. See, Aboites, Excepciones y privilegios, p. 115.

30

It was very bad timing. On 7 December 1923 Adolfo de la Huerta rebelled, with the support of more than half of the army. The government needed the support of governors, landlords, agraristas, industrialists and merchants. Therefore, Obregón derogated the federal property tax.

By February 1924 the delahuertista rebellion had been crushed. On 21 February 1924 a decree was immediately published imposing the new income tax. This third attempt to impose a direct tax was finally successful. The context was very different. First, it was now clear that oil production was rapidly declining. In 1923 oil revenues were only 22% of federal revenue, 29% less than in 1922. Oil revenues dropped to the level of 1921 and the future did not seem very rosy. Second, the delahuertista uprising involved the government in extraordinary expense, creating a deficit that put at risk the government’s ability to pay the foreign debt.

More importantly, the Mexican government would probably have been overthrown by the rebels if it had not had the support of the agrarian and workers’ militias, and agreements with the US – the Bucareli agreements - that allowed it to purchase weapons there. It also had the support of the US government and the oil companies during the rebellion. Therefore, the federal government had to repay its allies. Loyal generals had to be rewarded, agrarian reform had to be accelerated, the CROM’s patronage had to be augmented, and oil companies were given privileges.

31

These measures required more revenue, so although income tax was the most opposed and fiercely combated tax during the 1920s, this time the government did not capitulate. There was now no alternative: the income tax could no longer be postponed. Yet the delahuertista rebellion also brought a positive outcome for the government, as the latter was strengthened by its military victory. The combination of the urgent need for revenue with military triumph gave the government the necessary confidence to impose an extremely unpopular tax on both companies’ profits and personal income.

The most fierce and well-organized resistance came from merchants and to a lesser extent from industrialists. National and local chambers of merchants and industrialists joined forces to present a united front against the income tax. Nevertheless, merchants asked for its abolition, whereas industrialists, probably following their experience of forging a coalition with the CROM and government to raise import tariffs, only asked for reductions and waivers.

The opposition petitioned Obregón for the abrogation of the tax or at least reductions and waivers. Later, newspapers were flooded with articles and declarations by merchants and industrial leaders against the tax. The editorial stances of the newspapers were also against the income tax. National and local congresses of merchants and industrialists chambers were held, and their documents and statements opposing the tax were published. Studies undertaken by specialists were paid for and published by merchants’ and industrialists’ chambers. Finally, after it was clear that the government was firm in its position, opposition intensified. The national and regional chambers of

32

merchants openly called on the population to deny the payment, legal petitions were made against the tax in court, some merchants threatened to close their businesses, (some in fact did so), and even calls for rebellion were heard, echoing the American Revolution cry of “no taxation without representation”.44 Nothing worked. The government did not capitulate.

Calculating the real impact of the income tax on Mexican revenues is complicated. For instance, according to the Oxford Latin American Economic History Data, based on the data gathered by Mitchell45, from 1925 to 1930, on average, income tax was 12% of federal revenues. Yet, according to Iturriaga de la Fuente, Aboites and Collado, all of them using the data gathered by Aguilar46, the tax was only 6% of federal revenues. In any case, the impact was not that important, especially if compared with the impact of oil revenues. Nevertheless, the amount is significant, especially if the Oxford Latin American Economic History Data are considered.

Calculating the impact of other taxes is also problematic. There is no unified criterion for the origin of taxes. Thus, for example, Aboites includes the category of taxes on natural resources but excludes the category of taxes on rights and exploitation.47 On the contrary, Iturriaga de la Fuente, excludes the category of taxes on natural resources but includes the category of taxes on rights and

44

For a more complete narrative of the imposition of the income tax, see Collado, Empresarios y políticos, pp. 174-199; and Aboites, Excepciones y privilegios, pp. 131-153. 45 Mitchell, BR, International Historical Statistics. The Americas, 1750-1988, (Basingstoke: Macmillan Publishers, 1993). 46 Aguilar, Gustavo, Los presupuestos mexicanos, desde los tiempos de la Colonia hasta nuestros días, (México: SHCP, 1940). 47 See, Aboites, Excepciones y privilegios, p. 37 (Cuador 2).

33

exploitation.48 It is not surprising, then, to find that although all the authors and data consulted for this essay present almost the same figures for total federal revenues, they show different results when total taxes are divided by categories. Even more, in the few cases that they share categories, such as foreign trade revenues, their figures are dissimilar. That is why, in order to show a general tendency on the evolution of taxation in the 1920s, I present two types of figures. First, drawing from Cosío Villegas data49, I display a graph on the evolution of external and internal taxes.50 Second, using Iturriaga de la Fuente’s figures, I work a table comparing the composition of federal revenues in 1924, the last year of Obregón’s presidency, and 1929, the end of the period studied in this essay.

48

See, Iturriaga de la Fuente, José, La revolución hacendaria. La hacienda pública con el presidente Calles, (México: SEP, 1976), p. 77. 49 Cosío Villegas, Daniel, La cuestión arancelaría en México, vol. III, (México: Centro Mexicano de Estudios Económicos, 1932?), pp. 65 (Cuadro 5) and 70-71 (Cuadro 6). 50 Cosío Villegas includes in the category of external taxes, imports, exports and consular rights taxes. In the case of internal taxes, he only clarifies that he added to the whole category of “internal taxes” public services and exploitation taxes.

34

Figure 6: External and Internal Taxes as a percentage of Total Revenues, 19201929

External and Internal Taxes as a percentage of Total Revenues
80

70

60

% Total Revenues

50

40

External Taxes Internal Taxes

30

20

10

0 1920 1921 1922 1923 1924 Year 1925 1926 1927 1928 1929

Source: Cosío Villegas, Daniel, La cuestión arancelaría en México, vol. III, (México: Centro Mexicano de Estudios Económicos, 1932?), pp. 65 (Cuadro 5) and 70-71 (Cuadro 6).

Table 1: Structure of Federal Revenues, 1924 and 1929 Type of Tax Foreign Trade Industry Income Capitals Stamp Public Services Consular Rights The additional 10% Others rights, products and exploitation Total Percentage of Total Revenues, 1924 31.28 28.74 1.21 13 5.84 5.48 5.44 9 100 Percentage of Total Revenues, 1929 26.98 14.96 6.7 .85 6 19.93 .06 5.15 19.36 100

Source: Iturriaga de la Fuente, José, La revolución hacendaria. La hacienda pública con el presidente Calles, (México: SEP, 1976), p. 77.

35

IV.

The Calles Presidency: Political Coalitions and Low Taxation

President Plutarco Elías Calles had to face a rapid decline in oil revenues. In 1924 these were 20% of the federal revenue, but by 1928 they were only 6%. They had returned to the level they had been before 1918. In 1921 Mexico was the second world producer of oil, but by 1927 production had fallen 76%. The main problem was that almost all the wells had been exploited to their maximum capacity.
51

As Haber, Razo and Maurer argue, neither political instability, nor

government taxes, nor article 27, caused the decline in oil production. It was due to purely ecological reasons.52

The decline in oil revenues, combined with the extraordinary expense caused by the delahuertista rebellion, forced the government to suspend the payment of the external debt. Following this, Alberto Pani, the new minister of finance, had to renegotiate the Delahuerta-Lamont agreement, which was signed on the assumption that the high level of oil revenues would be constant. In the meantime, there was no possibility of a significant international loan. The extraordinary costs of the delahuertista rebellion were financed by national bank internal loans and taxes paid in advance by oil companies. Again, the only possible source of revenue was the Mexican economy itself, but oil revenues were now severely reduced.

51

See, Meyer, Revolution and Reconstruction, in Bethell, Leslie (ed), Mexico since Independence, (Cambridge: Cambridge University Press, 1991) p. 225. 52 See, Haber and et al, The Politics of Property Rights, pp. 223-35.

36

In 1925 Calles reformed income tax. His new decree established seven different tariffs that depended on economic activity and level of income.53 Also, in this year a slow movement towards fiscal centralization commenced. The most significant action here was the first National Fiscal Convention organized by Alberto Pani.54 Although the convention was not very successful at achieving a greater level of centralization55 it was useful in bringing about new direct taxes, and in December 1925 new inheritance taxes were created.56 Despite the decline in oil revenues, these measures, combined with an increase in public services and exploitation rights taxes, allowed the government to keep the level of taxation at 6% of Mexico’s GDP. Furthermore, in 1925 the economy grew by 6%57, so that the amount of revenue in pesos was augmented. These relatively good fiscal conditions allowed the government to reach a new agreement with Mexico’s creditors, and to resume the payment of the external debt. Also, enough resources could finally be taken out to create a central bank.

The establishment of the central bank was a key step in strengthening Mexican finances. The bank was able to finance small government deficits, and it played a key role in bringing the army under government’s control, because it gave credit to revolutionary generals to finance their new industrial and agricultural enterprises. Therefore, many generals switched arms for business.

53 54

See, Aboites, Excepciones y privilegios, p. 146. See, Ibid, pp. 291 – 301. 55 See, Díaz-Cayeros, Alberto, Federalism, Fiscal Authority, and Centralization in Latin America, (Cambridge: Cambridge University Press, 2006), pp. 39-73. 56 See, Iturriaga de la Fuente, p. 93. 57 See, Ibid, p. 85.

37

In April 1927 a new law on mining taxes was imposed.58 After this law no new significant taxes were imposed in the 1920s. On the contrary, Calles ’ presidency saw an intensification of the process initiated by Obregón whereby coalitions were formed with organized workers, peasants, industrialist, big entrepreneurs, and even some landlords. Therefore, in order to bind those coalitions, fiscal privileges and waivers were also deepened.

After the delahuertista rebellion the government’s alliance with the CROM was intensified. The CROM’s political and military support of the fe deral government through its workers’ militias was key to government victory over the rebels. In return for the CROM’s loyalty, Calles appointed the CROM leader Morones as minister of industry, commerce, and labour. Morones’ position permitted the CROM to control the designation of both government and labour

representatives in the labour conciliation and arbitration boards.59 Furthermore, the CROM also controlled the Department of Industrial Enterprise and Military Supply, the Federal Labour Office, and the National Printing Office, and with Calles’ support the CROM enforced fee deductions from public employees’ salaries, thereby increasing significantly its economic resources.60

The CROM’s power was also extended to local politics and, through the PLM, to Congress. Five governorships, including the Federal District, were controlled by

58 59

See, Iturriaga de la Fuente, La revolución hacendaria, p. 93. Conciliation and arbitration boards, consisting of government, employer and worker representatives, are responsible for legally registering labour unions. Collective labour agreements have legal standing only after they are deposited with the boards, which also enforce a variety of specific legal requirements regarding collective labour contracts, workplace conditions and minimum wages. The unions’ political viability is tied to the boards. Actually, conciliation and arbitration boards were – and still are - the most significant political tool to regulate labour affairs. 60 See, Middlebrook, The Paradox of Revolution, p. 79-80.

38

the CROM. By 1926, 11 out of 58 positions in the Senate and 40 out of 272 seats in the Chamber of Deputies were also held by CROM members.61

Control over these significant resources allowed Morones to centralize power within the CROM. In Febraury 1925, for instance, the CROM’s national leadership informed its affiliates that they could strike only with the permission of the central committee. As Middlebrook argues, the centralized power of Morones and his strong endorsement of economic reconstruction, including support for direct foreign investment, were fundamental for Calles ’ development programme.62 Furthermore, labour politics was an arena of constant confrontation between the federal government and governors. Specific labour legislation came under state jurisdiction. Nevertheless, both Article 123 of the Constitution and the precise national character of the CROM allowed the federal government to interfere constantly in local labour affairs.

Although the CROM and industrialists were, for obvious reasons, at odds in many issues, they shared an interest in protecting industries from foreign competition. Therefore, despite all their differences, organized workers and capitalists pushed the government to raise import tariffs. From the beginning of Obregón’s presidency, as we noted before, industrialists lobbied to bring back the protectionist policies they had enjoyed during the Porfiriato. Yet as we also noted before, protectionist tariffs reduced the government’s revenue. Before the CROM had been able to gain influence the President was better able to resist industrialists’ pressure, and import tariffs were not significantly increased.
61 62

See, Ibid, p. 80 See, Ibid, p. 78.

39

Nevertheless, the delahuertista uprising changed power relations. The CROM, allied with industrialists, had enough power to persuade the government to create new protectionists policies, leading to import tariffs being significantly increased from 1923-4 onwards. For instance, according to Haber, in the cotton industry, “the revenues from the excise were considerably less than the taxes that the government could have received had it imposed the revenuemaximizing import tariff”.63

A similar pattern was seen in other manufacturing industries. In 1925 Calles established a Tariff Reform Commission. This commission made

recommendations to the president, who then, acting by decree, determined the tariff. The commission was made up of two representatives of the Ministry of Industry, Commerce, and Labour controlled by the CROM, two representatives from the Ministry of Finance, one representative from the Ministry of Agriculture, one representative from the Federation of Chambers of Commerce, and one representative from the Federation of Industrial Chambers. “The industrialist had a mechanism to coordinate and signal their demands, and consumers had no representatives.”64

Table 2: Coefficient of Protection (tariff revenues divided by the value of dutiable goods)
Year 1920 1923 1928 Coefficient of Protection 14% 24% 31%

Source: Haber, Stephen, Armando Razo and Noel Maurer, The Politics of Property Rights. Political Instability, Credible Commitments, and Economic Growth in Mexico, 1876-1929, (Cambridge: Cambridge University Press, 2003), p, 152.

63 64

Haber and et al, The Politics of Property Rights, p. 149. Ibid, p. 152.

40

Table 3: Average Import Tariff for some Products
Year Average Import Tariff for Consumers Goods* 38% 47% Average Import Tariff for Textiles Average Import Tariff for Manufactured Clothing 43% 69%

1924 1930

45% 59%

*Without including foodstuffs. Source: Haber, Stephen, Armando Razo and Noel Maurer, The Politics of Property Rights. Political Instability, Credible Commitments, and Economic Growth in Mexico, 1876-1929, (Cambridge: Cambridge University Press, 2003), pp, 152-53.

According to Haber, Razo and Maurer, in the case of the mining sector, as in the case of oil, the Mexican governments of the 1920s did not have the ability to run the mines and smelters by themselves. Furthermore, as a consequence of political instability, the government needed tax revenues more desperately than the companies needed the income. Therefore, in the short run, companies had the ability effectively to threaten the government to cut back production if they were heavily taxed.65

The situation was even more difficult than in the case of oil revenues because metal prices collapsed after the early 1920s, and the government had even less room to negotiate an increase in taxes. As a result, in order at least to extract some revenue, the Mexican government “let the asset holders play a l arge role in writing the mining laws”.66 Obviously, the outcome was low tax rates, and those rates, according to Haber, were also tied to metal prices in New York.

65 66

See, Ibid, pp. 236-84. Ibid, p. 282.

41

Table 4: Estimated Taxation Rates for Mexican Mining (taxes as a percentage of the gross value of production)
Year 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 Federal and State Tax Rate Combined 10.7 7.2 7.9 6.9 6.8 7.2 6.3 5.3 5.6 4.7

Source: Haber, Stephen, Armando Razo and Noel Maurer, The Politics of Property Rights. Political Instability, Credible Commitments, and Economic Growth in Mexico, 1876-1929, (Cambridge: Cambridge University Press, 2003), p, 283 (Table 7.13).

The government’s coalition with peasants and some landlords, many of them revolutionary generals who had replaced Porfirian landlords followed roughly two paths. On the one hand, in areas with potential for agricultural exports, some landlords (either military men, or civilian farmers allied with generals) were allowed to keep relatively large extensions of land, and the federal government provided them with credit and irrigation programmes. For instance, the government constructed four large dams in Durango, Aguascalientes, Tamaulipas, and Coahuila.67 Irrigation work sponsored by the federal government was begun in 1926, and expenditure on irrigation grew in the following years. In 1926 1.6% of all federal funds were expended on irrigation, but by 1928 the amount achieved was 6.9%.68

On the other hand, in areas with staple crops, much land was distributed among peasants in the forms of ejido lands.69 Land distribution followed political

67 68

Ibid, p. 315. See, Wilkie, The Mexican Revolution, pp. 132-34. 69 Ejido land is not private property and cannot be bought and sold as if it were. However, since the constitutional reforms of 1992, ejido land can be converted into private property and sold to third parties.

42

criteria. For instance, former Zapatistas in Morelos who were allies of Obregón and afterwards of Calles were among the first groups to receive land. “By 1927 statistics indicated that Morelos had changed more from agrarian programs than any other state… Provisionally at least 80 per cent of the state’s farming families now held field of their own, which altogether amounted to around 75 per cent of the arable land”.70 In other areas agrarian reform was accelerated during and after the delahuertista uprising in compensation for peasants’ military participation against the rebels.

The acceleration of agrarian reform after the delahuertista rebellion was clear. Under Obregón’s government 624 villages and 139,320 heads of families received around 1.2 million hectares of land. This was more than triple the number of villages and ejidatarios receiving land during Carranza’s regime.71 Yet, during the Calles government, after the de la Huerta uprising, 3.2 million hectares of land were distributed to 1,576 villages and 307,607 ejidatarios. This was more than three times as much land and villages as during the previous land distribution.72

It is important to notice that agrarian reform and therefore the alliance between the government and peasants followed a complicated and messy pattern. Although the struggle for land was used by both the federal government and caciques to construct clientelar relationships, agrarian reform in the 1920s was not only controlled from above but also gained from below. The story of the agrarian revolt in Naranja and the Zacapu region of Michoacán analyzed by
70 71

See, Womack, Zapata, p. 374. See, Ibid, p. 87. 72 See, Ibid, pp. 96-7.

43

Paul Friederich is an excellent example of this complex dynamic, involving: local agrarian mobilisation for land reform; government support for agrarian communities (and in some cases effective land distribution) in exchange for military support during rebellions; active mediation and manipulation by political brokers; and dissent and ensuing repression.73

The alliance between the federal government and ejidatarios was bolstered by another not very well known but important innovation: the ejidal fiscal waiver. It might be true that many ejidatarios in the 1920s did not enjoy the same irrigation benefits that some of the new big land owners enjoyed, yet during the decade they were able to obtain a fiscal waiver.

At the beginning of land reform this fiscal waiver for the ejidos was not clear; but from the early 1920s it was fairly evident that the federal government was trying to create a special fiscal regime for the agrarian sector. In 1921 the Agrarian National Commission established numerous fiscal waivers for the ejidos74. Nonetheless, other federal departments ignored the Agrarian National Commission regulations. For instance, the ejidos were charged for the use of water until President Calles exempted them for the payment of this utility in 192675. A year later the law of “patrimonio parcelario ejidal” established that the only tax that the ejidos must pay was the local property tax. This special fiscal regime was confirmed by the agrarian codes of 1934 and 1943, and also by the agrarian law of 1971.

73 74

See, Friederich, Paul, Agrarian Revolt in a Mexican Village, (New Jersey: Prentice-Hall, 1970). See, Fabila, Manuel, Cinco siglos de legislación agraria 1493-1940, (México: Centro de Estudios Históricos del Agrarismo Mexico-Secretaría de la Reforma Agraria, 1981), p. 377. 75 Aboites Aguilar, Luis, Excepciones y privilegios, p. 232.

44

According to Aboites, although the local property tax could not exceed 5% of the annual value of the ejidal production, many ejidos refused to pay it76. Many local governments protested, but the federal government was as a rule not very receptive to their complaints. Therefore, many ejidos did not even pay the property tax77.

Finally, in the case of the income tax, despite all the efforts to impose it, according to Aboites there are some indications that this tax was also used as a negotiating tool between the federal government and taxpayers, especially the wealthiest.78

For instance, just after the 1920s, in 1933, the Under-secretary of Finance, Marte R. Gómez, argued that income tax “has been perverted and its performance is very similar to the inconvenient system of the stamp tax” 79. Furthermore, in the plan sexenal80 of 1934, the National Revolutionary Party protested that income tax had been transformed into a working class tax because this segment of the population was the only one that was unable to avoid it.”81 However, Aboites himself recognizes that the evidence is still weak, and that more archival research is needed to present a better picture of this phenomenon. Yet, following the logic of forging political alliances at the cost of taxation that we found with other taxes, it would not be odd to find that some
76 77

Property tax was calculated in terms of production rather than property value. See, Aboites, Excepciones y privilegios, p. 233 and 234. 78 Ibid, p. 152. 79 Ibid, p. 149. 80 Plan Sexenal was the name of the “Government Plan”. It was presented at the beginning of the presidential terms. Nowadays it is called “Plan Nacional de Desarrollo” (National Plan for Development). 81 Ibid, p. 149.

45

kind of evasion was indeed tolerated in the case of income tax in exchange of political support.

46

Conclusion

One of the paradoxes of the Mexican Revolution is that although it achieved a stronger and more stable state than both the Porfirian and the rest of the Latin American states, the features that gave it its strength and stability were the result of the actions of a weak state trying to survive in a challenging environment. The convergence of those social and political movements developed during the armed revolution, with a fragile state threatened by uncontrolled generals, gave birth to a new regime that in order to subsist forged a broad coalition with organized workers and peasants, capitalists, local political bosses and some military men. This broad alliance and the particularities that shaped it created the bases for a durable and stable regime unprecedented in the history of Latin America.

A key element when seeking to understand the process that gave birth to this coalition is the combination of the fiscal structure inherited by the new regime with the type of financial demands that it was enduring. The new regime inherited from the old regime a poor fiscal system dependent on indirect taxes, and from the Revolution monetary chaos and the impossibility of accessing international or national credit. The financial demands that the revolutionary governments had to meet came from inside rather than from outside. The new regime did not have to prepare a national army in order to fight an international war. On the contrary, it had to demobilise and bring under its control a heterogeneous revolutionary army commanded by ambitious generals scattered all around the country. Therefore, the fiscal demands were modest in

47

comparison with the fiscal demands generated by “total wars.”82 Defeating local rebellions is cheaper than defeating foreign armies, especially when rebels can be counterbalanced through political alliances rather than through revenues.

The inheritance of a weak fiscal system and the inability to get quick money through credit created the incentives to forge a broad coalition in order to counterbalance the military. It was precisely the fiscal limitation inherited by the new regime that restricted its ability to offer material benefits in exchange for political support. One of the elements that helped the government to forge a broad coalition (without spending huge quantities of money that it did not have) was offering low tax rates and fiscal waivers in exchange for political support.

This process of coalition formation shaped a fiscal system full of waivers, privileges, and tolerated evasion that also reinforced a pattern of clientelistic politics. These characteristics of the fiscal system forged during the 1920s prevailed for many decades and even today many of these elements are still present.

Ironically, the weakness of the fiscal structure helped to forge a stronger and more stable state than its previous counterpart, though the formula of ‘low taxes in exchange for political support’ that created a national state “without” taxation was also one of the main weaknesses of the new regime. After some decades, the Mexican state, was put in an extremely difficult position by the lack of revenues, the growth of the population and the demand for more expensive

82

Centeno, Blood and Debt, p, 21.

48

social and economic benefits, such as health, housing, and education, instead of the relatively cheap demands of agrarian reform and eight hours journey.

49

Bibliography, Books and Articles

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