Mexico – Taxation Or Confiscation?

Two interesting illustrations of Mexico’s entanglements are worth recording. They show how defenseless she is before her great northern neighbor and how incumbent it is on this neighbor to use its strength sparingly and in accordance with the promptings of reason and humanity. Today General Obregón as President of the Republic has but one sheet anchor of salvation—the consciousness that his policy is based on justice and the hope that interest no less than principle may impel the present businesslike Administration of the United States to give him the requisite time and opportunity to unfold it.

Hampered by a relatively light foreign debt for the settlement of which creditors and politicians are daily clamoring, the Obregón Cabinet is at its wits’ end to find the wherewithal to pay the interest. And unless it can hit upon some happy device, the country will soon fall under an international financial as well as an American moral tutelage. Usually necessitous governments have the choice between taxation and a loan. But Mexico is an exception. Not yet recognized by the only country able to lend her money, her rulers are obliged to obtain a contribution to the service of the foreign debt by taxing what will bear taxation. And that is oil. There is no other way. Accordingly General Obregón has recently increased the tax on crude oil produced in the country by an average, it is computed, of twenty-five per cent and decreed that the proceeds shall not be swept into the bottomless pit of wasteful expenditure but shall be applied exclusively in making payments on the foreign debt. This measure is gall and worm-wood to those companies which possessing no refineries in Mexico will have to pay the augmented impost. Their representatives in Washington immediately called the attention of the State Department to the decree which they regard as illegal in form and “virtual confiscation” in effect, and there-fore a twofold crime in international law. They moved that the State Department should include their complaint in its list of claims against the Mexican Government which would then be compelled to adjust its Constitution, its legislation and its taxation to the best interests of the powerful oil interests. Thus the camel’s hump would follow his nose into the Mexican tent.

President Obregón contemplates the issue from the same angle of vision as did Russia’s eminent financier, the late Count Witte, whose opinion may be summarised as follows. Taxation is an essentially democratic measure. It furthers the interest of labour which has a right to demand that as large a share as is safely possible of the indispensable public expenditure shall be defrayed by taxes on capital. Today this is a recognised maxim everywhere and a peremptory necessity in the Mexican State which sorely needs money wherewith to heal the wounds inflicted by ten years of anarchy and to undertake reforms without which the State cannot long subsist. And at present money can be had only within the boundaries of the Republic. None of the ordinary devices are of avail. Economy presupposes a fairly well filled Exchequer—a boon which Mexico has not enjoyed since the days of Limantour. Moreover thrift, however stringently practised, would contribute nothing towards the service of the foreign debt, seeing that the pinch of penury is felt in all departments. And at the moment when more money is required than ever before all hopes of a foreign loan are coincidentally barred by what may be termed the Triple Alliance of American, British and French bankers, which has imposed on Mexico a politico-financial boycott.

Every effort made therefore in these conditions to hinder the imposition of adequate taxes on oil is at the same time a clever manoeuvre to tighten the noose round the neck of the Mexican State. And this is the construction put upon it by Mexican statesmen.

The only way to ease even partially a situation like this, which is as painful as it is dangerous, is taxation, and to this expedient every country in the world is having abundant recourse today. Indeed in some progressive States taxation has been raised to a level not far removed from confiscation. In others, as in Germany and Sweden, the Governments have compelled the great industries to admit them as partners with a right to a share in the profits. Against these innovations private corporations and individuals have loudly murmured but in no case have their respective Governments ventured to protest on their behalf. For they are all in the same boat. Necessity knows no law but that of justice and it is recognised as a principle that if all the industries of a class are equally liable to a tax, the demands of justice are satisfied. If it be objected that in the case under consideration the industries in question are all owned by English-speaking foreigners who regard it as an unfriendly act, Mexicans might fairly retort that the possession of one lucrative monopoly does not entitle the holder to claim another. Besides, natives and foreigners are alike subjected to the new tax.

There are, however, other ways of looking at the matter. Every country is entitled and every government morally obliged in the interests of its citizens to adopt protective measures in the form of export dues on those natural resources which, once exhausted, can never be replenished. And no foreign State, however painfully its nationals may be hit thereby, can fairly oppose the levy of such a tribute. Unhappily for themselves many countries have failed to exercise that right and their respective governments have neglected to perform the corresponding duty. The consequences which en-sued from this lack of provision are writ large today in the decay of industry and commerce, the plague of chronic unemployment, the unrest—in some lands the revolt—of labour and general discontent. The twenty-eight millions of workers in England who during part of the year 192I were dependent for their living on doles meted out by the State were currently supposed to be strike-victims. But one would not be far wrong if one sought for the origin of their pauperism in the improvidence of their rulers who for generations allowed coal, iron ore and other national resources to be sold for a song and made no provision for the lean years which they ought to have known were coming.

To-day statesmen vainly deplore the shortsightedness of their predecessors who permitted the most precious produce with which Nature had endowed their country to be brought to market and disposed of, so to say, for a mess of pottage, to the foreigner who built fleets, railways and established lucrative industries with the proceeds of the transaction. If an importing country is earning, say, a thousand per cent profit on raw materials, is it meet that the country which owns them should be forced to do with ten or twenty per cent? In favour of such a contention there is nothing to be urged.

Examples are many and instructive. Coal is the tap-root of Great Britain’s economic and political standing among the nations of the world. Had it been suddenly deprived of that re-source, the Empire would have fallen to pieces and the British Isles would have shrunk to the dimensions and the status of Spain. And yet coal has for a century been squandered as though the quantities available were inexhaustible. In the year 1816 only 238,000 tons of that mineral, including culm and bunker coal, were sent out of the country,’ but in 184o the quantity was already 1,606,000 tons; in 1854 it reached 4,309,000; and in 1862 it was officially given as 8,302,000. A quarter of a century later the exports totalled 24,461,000 tons; eight years later it was 57,850,000 tons, and in the year 1913 it had risen to 97,720,000 tons, to the joy of the mine-owners. The price it fetched was but a fraction of what must be paid for it today. In order to keep up the exportation, the cost of production was forced down so low that the miners had to dispense with a decent living wage as well as the sailors who manned the steamers to Singapore, the Piraeus and other foreign ports. Even the mine-owners contented themselves with less than reasonable profits and the country in general with fewer benefits. The workers were ill-paid, badly-housed and chronically embittered against the upper class.

But the Scandinavian countries, Greece, Russia and other States were enabled to build merchant fleets and establish a powerful carrying trade at England’s expense. Moreover, she picked the very best product of her coal measures for the home and foreign markets, leaving the inferior coal to be mined later on at an enormous cost. Today the best quality coal is said to be well nigh exhausted.

A similar policy of wastefulness were pursued in the case of iron ore. From the year 1819, when Great Britain exported 73,000 tons of iron and steel to certain foreign countries, the quantities sold to foreign consumers went on increasing, at first very gradually and then with amazing rapidity. Thus in the year 1845 the total sent out of the United Kingdom was 352,000 tons; in the year 1853 it reached 1,261,000 tons; in 1872 it had grown to 3,383,000 tons, and in 1907 the official figures were 5,152,000 tons.

The United States dealt and is still dealing in the same thriftless way with its material resources. A noteworthy percentage of its forests has already been cut down. Estimates made by the American Paper and Pulp Association, which admittedly do not claim to be more than approximate, place existing forests in the United States at between 500,000,000 and 550,000,000 acres. This country originally had a forest area of about 850,000,000 acres. Of the present area, 200,000,000 acres are believed to be merchantable timber, 250,000,000 acres partially burned and cut over land on which there is sufficient natural production to insure a fair growth. At the present rate of consumption it is estimated, the stand of matured timber in the United States will be exhausted within fifty years unless a drastic re-afforestation policy is adopted and enforced.

It was those forests and the trades and industries to which they gave rise that enabled railways, steamships and flourishing marts to be constructed. The city of Seattle, for instance, is a product of splendid forests which are now fast vanishing and of mines which are approaching the point of exhaustion, and when these will have ceased to repay the cost of exploitation and nothing remains but agricultural produce, the effects on the city will be painful and far-reaching. The timber sold to the foreigner did not, it is alleged, fetch more than a mere fraction of its intrinsic value, the remaining three-quarters going to enrich countries overseas.

Similar remarks are applicable to the low prices which ruled for iron, copper and oil. And according to the most competent geologists, half of the oil in the United States is already exhausted. Germany bought large quantities of American oil at prices which are now considered to have been inadequate. Her industrial corporations refined it at large profits and manufactured various other articles out of the by-products. For a considerable period the price was one dollar for a barrel, while the Germans sold the gasoline, vaseline, saccharine, paraffine, perfumes and about two hundred other by-products at prices which brought the profits up to twenty dollars a barrel.

A cognate if less apt illustration is afforded by the United States which with a practical monopoly of cotton disposed of the crops during several decades at the rate of from five to eight cents a pound, a price rendered possible only because of cheap labour in the South. This money did not allow the labourers a sufficient living wage, the owners a fair return, nor the railway companies adequate pay for carrying it to market. What could and should have been done was to levy an export duty on the produce, raise the wages of the agricultural labourer and oblige the foreigner to whom an exorbitant share of the value was accruing to contribute to the well-being of the country and the people who were creating it.

In those improvident ways the English-speaking races went on compelling or allowing their own people to dissipate its wealth to enrich strangers overseas.

Now is it unreasonable in itself or tantamount to an unfriendly act towards foreigners for the President of Mexico, who has the interests of his country at heart, to profit by the mistakes of the British and the Yankees? He does not think so, nor does he believe that the great English-speaking nations entertain any such opinion. Mexico’s oil, mines and forests constitute her greatest economic assets and her heaviest political curse, and to allow these resources to be carried out of the country in the improvident way in which England and the United States permitted their principal resources to be exported would be a crime. And General Obregón refuses to commit it.

The sharp polemic now going on between the press of Mexico and that of the United States on this question of taxation is confused by the importation into it of political issues. The essence of the matter would seem to be whether or not the increased tax is confiscatory. If the reply is in the negative, there is no objection derived from international law which will hold against it. And that is the stand taken by the Mexican Government. Of course if it could be shown conclusively not merely that production will sensibly fall off in consequence but that the oil industry as a whole will become unprofitable, there should and would be no hesitation on the part of the Mexican Administration to temper the wind to the shorn sheep. For no Government, and least of all one that needed money as badly as does that of Mexico, would be fatuous enough to commit economic suicide by cutting off the main source of its existence. Confiscation or a tax equivalent to this would spell bankruptcy and ruin to the Mexican State, for taxation to the point of confiscation carries its own remedy.

Mexicans urge that to-day oil is being extracted and exported at a rate calculated to alarm the nation’s trustees. It is a repetition of what England did with her coal and iron ore. Immense fortunes have been and are being made and taken away by foreigners, few abiding traces of which are left in the land. So considerable are the quantities of Mexican oil at present imported into the United States that voices have been uplifted in the latter country calling for an import duty on it. The Fordney tariff is a conclusive proof that the Mexican oil industry can support a heavier impost than it has yet borne and it is meet that the Mexican States should get the benefit of it. Why should a foreign government as well as foreign corporations draw enormous gains from a product which yields inadequate profits to the country in which it is found? If oil can bear an increase of taxation—and this is admitted by all—why should the Government which contributes nothing to its production be the beneficiary? Again, it cannot be asserted that there is any international law which forbids a government to regulate in the interests of the community the exploitation of natural produce or even manufactured commodities. Every State is at liberty to put in force such measures for the purpose as it deems called for. Examples of the exercise of this right during and since the war are numerous, and for the protection of a source of wealth which can never be replenished, the right is unassailable and the duty to exercise it imperious.

From the fiscal point of view also the arguments that favour the Mexican position are forcible. There is something peculiarly repellent in the contention that a nation should go to rack and ruin for lack of the funds requisite to carry on the Government of the country when that country is teeming with wealth. And Mexico thinks she can discern a Mephistophelian touch in the policy forged by a combination of powerful and unfriendly interests which presses her to pay her debts, yet closes to her all avenues of credit throughout the globe, and by way of crowning the work disputes her right to raise part of the money by taking her full share of the resources which she herself possesses at home. A more stringent boycott, a more deadly grip, it would be difficult to imagine.