tesis oxford anm

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Candidate Number: 54215

Aurelio Nuo

Trinity, 2008-05-19

St Antonys College

Building a National State without Taxation: thePolitical 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 Obregn 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 Porfirios 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, Mexicos 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,inJournal 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 themilitary 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 lvaro

Obregn (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 alreadytaken what it wanted from Mexico, thus by the 1920s a potential US invasion, such as the occupation ofVeracruz in 1914, did not put at risk the future of the country. A hypothetical invasion would only be atemporary 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 andCuba, 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 inTheories and Realities, (Chicago: Chicago University Press, 1951).


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national loans, the Obregns 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 Elas 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 Mexicos 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, Mexicos 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

0

5

10

15

20

25

30

35

40

45

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Year

%o

fGDP

Mexico

UK

US

Brazil

Argentina

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), from1970 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 to1970, Aboites,Excepciones y privilegios,p. 397 (Cuadro A2), and from 1970 to 2000, OECD, Revenue Statistics.

4 Percentages for Mexico, Brazil and Argentina were calculated using the Oxford Latin AmericaEconomic History Database:http://oxlad.qeh.ox.ac.uk. For UK percentages see Aboites,Excepciones y

privilegios. Modernizacin Tributaria y Centralizacin en Mxico, 1922-1972, (Mxico: El Colegio deMxico, 2003),p. 397 (Cuadro A2). For US percentages see US Department of the Treasury, Factsheets: Taxes. History of the US Tax System:www.treasury.gov/education/fact-sheets/taxes/ustax.shtml.
http://oxlad.qeh.ox.ac.uk/http://oxlad.qeh.ox.ac.uk/http://www.treasury.gov/education/fact-sheets/taxes/ustax.shtmlhttp://www.treasury.gov/education/fact-sheets/taxes/ustax.shtmlhttp://oxlad.qeh.ox.ac.uk/http://oxlad.qeh.ox.ac.uk/http://oxlad.qeh.ox.ac.uk/http://www.treasury.gov/education/fact-sheets/taxes/ustax.shtmlhttp://www.treasury.gov/education/fact-sheets/taxes/ustax.shtmlhttp://www.treasury.gov/education/fact-sheets/taxes/ustax.shtmlhttp://www.treasury.gov/education/fact-sheets/taxes/ustax.shtmlhttp://oxlad.qeh.ox.ac.uk/http://www.treasury.gov/education/fact-sheets/taxes/ustax.shtmlhttp://oxlad.qeh.ox.ac.uk/


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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 constraintsof 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: BlackwellPublishers, 8th edition, 1998), pp. 1-37.6 Ibid, pp. 67-95.7 See, Aboites,Excepciones y privilegios,p. 397 (Cuadro A2).8See, 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 ngel,Blood and Debt. War and the Nation-State In Latin America,(Philadelphia: The Pennsylvania State University Press, 2002), p. 104.
http://www.treasury.gov/education/fact-sheets/taxes/ustax.shtmlhttp://www.treasury.gov/education/fact-sheets/taxes/ustax.shtmlhttp://www.treasury.gov/education/fact-sheets/taxes/ustax.shtml


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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 regimes allies.

Another element that helped the new regime to forge a coalition without

spending heavily was the fact that both land reform and organized workers

demands could be achieved without exorbitant expenditure. The new

Constitution of 1917 (especially article 27), combined with the Sonorans10

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

10 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: lvaroObregn, Adolfo de la Huerta and Plutarco Elas Calles. The presidential periods of Obregn 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 governments control and buying generals loyalty with cash was

expensive. The Confederacin Regional Obrera Mexicana (CROM), the

principal workers organization allied with the government, 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 governments coalition was low

taxation, the government had very limited options when it came to raising more

money in order to expand the governments 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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governments 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 governments 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 inexchange 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 WorldDevelopment, (London: Routledge, 1995), p. 3.12

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


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1920s, overestimate the governments 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, (NewYork: Vintage Books, 1970), p. 42. For the case of Chihuahua see, Katz, Friederich, The Life and Timesof 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

0

10

20

30

40

50

60

70

1876 1880 1885 1890 1895 1900 1905 1910

Year

%o

fTotal

FederalRevenues

Customs

Stamp Tax

Public Services and Eploitation

Sources: Crdenas, Enrique, Cuando se origin el atraso econmico de Mxico. La economamexicana en el largo siglo XIX, 1780-1920, (Madrid: Editorial Biblioteca Nueva, 2003), pp. 154-55 (Cuadro V.3). And Coso Villegas, Daniel, La cuestin arancelara en Mxico, vol. III,(Mxico: Centro Mexicano de Estudios Econmicos, 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, Jos Ives Limantour, implemented a

14

See, Crdenas, Enrique, Cuando se origin el atraso econmico de Mxico. La economa mexicana enel 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

0

2

4

6

8

10

12

14

16

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

Year

GDP% Mexico

Brazil

Argentina

Source: Oxford Latin American Economic History Database.

15 See, Crdenas, Cuando se origin 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 Obregn Presidency: Limits and Possibilities of Fiscal Extraction

On 1 December 1920, after the brief interim presidency of Adolfo de la Huerta,

lvaro Obregn 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. Obregn 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 (1917-

20) ordered the confiscation of the assets of the Mexican banks, forcing them to

finance his government, yet when Obregn 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 Pea, Luis,Hacia el Nuevo Estado. Mxico, 1920-1994, (Mxico: Fondo de Cultura

Econmica, 2000), pp. 85-87.17 See, Zebada, Emilio,Banqueros y revolucionarios: la soberana financiera de Mxico, 1914-1929(Mxico: Fondo de Cultura Econmica 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

peoples confidence in government money. Gold and later silver coins were

Mexicos 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 Obregn 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 Argentinas, 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 Crdenas the Mexican government did not develop effective instrument ofmonetary policy until the great depression of 1929. See, Crdenas, Enrique,La hacienda pblica y la

poltica econmica, 1929-1958, (Mxico: Fondo de Cultura Econmica 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

0

2

4

6

8

10

12

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

Year

GDP% Mexico

Brazil

Argentina

Source: Oxford Latin American Economic History Database.

When Obregn 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 Obregn, was not wholly loyal to the

president, as was demonstrated three years later when, following Adolfo de la

Huertas uprising, more than half the army rebelled.

20See, 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 Confederacin 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 governments ability to pay external debts and the restitution of the

national banks assets.

Obregn 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 Obregn, as was argued previously, both land reform and the

most basic workers demands could be met without spending too much money.

Consequently, Obregn 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 Obregns desire to

accelerate agrarian reform and forge a political coalition with the agraristas. 22

A year before, Obregn had forged a durable alliance with the CROM. In a

secret pact, the CROM promised to mobilise support for Obregn 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 Obregn 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 governments 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. Mexicos Way Out, (Chapel Hill: The University of North CarolinaPress, 1937), p. 81.23

See, Middlebrook, Kevin, The Paradox of Revolution. Labor, the State and Authoritarianism inMexico, (Baltimore: The Johns Hopkings University Press, 1995), p. 75.


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was expended on the military. During the Obregns 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 Obregns government budgetary pressures

were relatively high, and he needed to search for more revenue. Obregn 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, Mara del Carmen,Empresarios y

polticos, (Mxico: 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 Obregn 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 Obregn presidency the coalition between the

government and the industrialists was at an incipient stage, so Obregn 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

See, Haber and et al, The Politics of Property Rights,p. 140.28 Ibid, p. 142.29 See, Ibid, pp, 151-54.


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taxing it is very good business. Obregn 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 Obregns 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 governments

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 governments 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 Mexicos 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

Obregn 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, Obregn 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 Carranzas

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 Obregn the companies reached an agreement: the

Mexican government secured an increase in oil revenues, but the companies

obtained a 60% reduction in Obregns new export tax.32

31 See, Ibid, p. 208.32 Ibid, pp. 208-9.


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26

Despite all the difficulties and the clear limitations on the governments 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

0

5

10

15

20

25

30

35

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

Year

%TotalRevenue

0

50

100

150

200

250

MillionsofBarrels

Oil Revenues (% of Total Revenues)

Oil Production (Millions of Barrels)

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


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Oil revenues allowed the Mexican government to restore assets to the national

banks in 1921 and to reach an agreement with Mexicos 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, Obregn 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

peoples wealth is not the same as indirect extraction of trade. As Tilly argues,

taxing peoples own profits, properties or income requires a much more

33 See, Zebada,Banqueros y revolucionarios,pp. 182-222.


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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 peoples direct resources

beyond the urban centres where capital was normally concentrated, would have

34 Tilly, Charles,Democracy, (Cambridge: Cambridge University Press, 2007), p, 202.35See, 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: CornellUniversity Press, 1998), pp. 61-63.37 See, Tilly, Coercion, Capital, and European States, pp. 16-20; 87-89, and 132-43.


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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, Obregn tried to open up all possible alternatives in

order to expand Mexican revenues. Yet, very soon, political reality and his

pragmatism delimited the options.

Obregns 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 Zebada, 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 statepenetration 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 polticos,pp. 164-66.40 See, Zebada,Banqueros y revolucionarios,p. 160.


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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 Mexicos 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 Crdenas y vila Camacho.Su desempeo legislativo 1934-1946,Dilogo y Debate de Cultura Poltica, 1 (abril-junio), 1997, pp.24-25.42 See Collado,Empresarios y polticos, p. 116.43

The governors argued that following the logic of articles 117 and 118 of the Constitution that forbadestates to impose indirect taxes, the federation should be forbidden to impose direct taxes. The sameargument was used against income tax. See, Aboites,Excepciones y privilegios,p. 115.


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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,

Obregn 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 governments 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 CROMs patronage had to be augmented,

and oil companies were given privileges.


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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 Obregn 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


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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 ypolticos,pp. 174-199; and Aboites,Excepciones y privilegios,pp. 131-153.45 Mitchell, BR,International Historical Statistics. The Americas, 1750-1988, (Basingstoke: MacmillanPublishers, 1993).46

Aguilar, Gustavo,Los presupuestos mexicanos, desde los tiempos de la Colonia hasta nuestros das,(Mxico: SHCP, 1940).47 See, Aboites,Excepciones y privilegios,p. 37 (Cuador 2).


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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 Coso Villegas data49, I display a graph on the

evolution of external and internal taxes.50Second, using Iturriaga de la Fuentes

figures, I work a table comparing the composition of federal revenues in 1924,

the last year of Obregns presidency, and 1929, the end of the period studied

in this essay.

48 See, Iturriaga de la Fuente, Jos,La revolucin hacendaria. La hacienda pblica con el presidenteCalles, (Mxico: SEP, 1976), p. 77.49 Coso Villegas, Daniel, La cuestin arancelara en Mxico, vol. III, (Mxico: Centro Mexicano deEstudios Econmicos, 1932?), pp. 65 (Cuadro 5) and 70-71 (Cuadro 6).50

Coso Villegas includes in the category of external taxes, imports, exports and consular rights taxes. Inthe case of internal taxes, he only clarifies that he added to the whole category of internal taxes public

services and exploitation taxes.


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Figure 6: External and Internal Taxes as a percentage of Total Revenues, 1920-

1929

External and Internal Taxes as a percentage of Total Revenues

0

10

20

30

40

50

60

70

80

1920 1921 1922 1923 1924 1925 1926 1927 1928 1929

Year

%TotalR

evenues

External Taxes

Internal Taxes

Source: Coso Villegas, Daniel, La cuestin arancelara en Mxico, vol. III, (Mxico: CentroMexicano de Estudios Econmicos, 1932?), pp. 65 (Cuadro 5) and 70-71 (Cuadro 6).

Table 1: Structure of Federal Revenues, 1924 and 1929

Type of Tax Percentage of TotalRevenues, 1924

Percentage of TotalRevenues, 1929

Foreign Trade 31.28 26.98Industry 28.74 14.96

Income - 6.7Capitals 1.21 .85Stamp 13 6

Public Services 5.84 19.93Consular Rights 5.48 .06

The additional 10% 5.44 5.15Others rights, products and

exploitation 919.36

Total 100 100Source: Iturriaga de la Fuente, Jos,La revolucin hacendaria. La hacienda pblica con el presidenteCalles, (Mxico: SEP, 1976), p. 77.


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IV. The Calles Presidency: Political Coalitions and Low Taxation

President Plutarco Elas 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.


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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 Mexicos 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

Mexicos 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 governments control, because it gave

credit to revolutionary generals to finance their new industrial and agricultural

enterprises. Therefore, many generals switched arms for business.

53 See, Aboites,Excepciones y privilegios,p. 146.54 See, Ibid, pp. 291301.55 See, Daz-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.


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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 Obregn 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 governments alliance with the CROM was

intensified. The CROMs political and military support of the federal government

through its workers militias was key to government victory over the rebels. In

return for the CROMs 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 CROMs power was also extended to local politics and, through the PLM, to

Congress. Five governorships, including the Federal District, were controlled by

58 See, Iturriaga de la Fuente,La revolucin hacendaria,p. 93.59 Conciliation and arbitration boards, consisting of government, employer and worker representatives,are responsible for legally registering labour unions. Collective labour agreements have legal standingonly after they are deposited with the boards, which also enforce a variety of specific legal requirementsregarding 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 mostsignificant political tool to regulate labour affairs.60 See, Middlebrook, The Paradox of Revolution, p. 79-80.


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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 CROMs 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

Obregns 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 governments 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 See, Ibid, p. 8062 See, Ibid, p. 78.


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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 revenue-

maximizing 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 (tar i f f revenues divided b y the value ofdut iable good s)

Year Coefficient of Protection1920 14%1923 24%1928 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 Haber and et al, The Politics of Property Rights,p. 149.64 Ibid, p. 152.


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Table 3: Average Import Tariff for some Products

Year Average ImportTariff forConsumers Goods*

Average ImportTariff for Textiles Average ImportTariff forManufactured

Clothing1924 38% 45% 43%1930 47% 59% 69%

*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 large 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 See, Ibid, pp. 236-84.66 Ibid, p. 282.


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Table 4: Estimated Taxation Rates for Mexican Mining (taxes as apercentage of the gross v alue of product ion)

Year Federal and State Tax Rate Combined1920 10.7

1921 7.21922 7.91923 6.91924 6.81925 7.21926 6.31927 5.31928 5.61929 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 governments 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 Ibid, p. 315.68

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 theconstitutional reforms of 1992, ejido land can be converted into private property and sold to third parties.


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criteria. For instance, former Zapatistas in Morelos who were allies of Obregn

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 states 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 Obregns 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 Carranzas 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 Michoacn analyzed by

70

See, Womack,Zapata,p. 374.71 See, Ibid, p. 87.72See, Ibid, pp. 96-7.


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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 ejidalfiscal 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 ejidalestablished 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 See, Friederich, Paul,Agrarian Revolt in a Mexican Village, (New Jersey: Prentice-Hall, 1970).74

See, Fabila, Manuel, Cinco siglos de legislacin agraria 1493-1940, (Mxico: Centro de EstudiosHistricos del Agrarismo Mexico-Secretara de la Reforma Agraria, 1981), p. 377.75 Aboites Aguilar, Luis,Excepciones y privilegios, p. 232.


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According to Aboites, although the local property tax could not exceed 5% of

the annual value of the ejidalproduction, 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. Gmez, argued that income tax has been perverted and its

performance is very similar to the inconvenient system of the stamp tax79.

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 Property tax was calculated in terms of production rather than property value.77 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 thepresidential terms. Nowadays it is called Plan Nacional de Desarrollo (National Plan for Development).81 Ibid, p. 149.


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

political support.


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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


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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.


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social and economic benefits, such as health, housing, and education, instead

of the relatively cheap demands of agrarian reform and eight hours journey.


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