Papers Relating to the Foreign Relations of the United States, 1918

File No. 837.51/255

The Minister in Cuba ( Gonzales) to the Secretary of State

No. 481

Habana, August 1, 1917.

Sir: I have the honor to send herewith a translation of President Menocal’s message vetoing the act of Congress which authorized a 30,000,000-dollar loan and imposed special taxes to provide tor interest and the retirement of said bonds. The veto, as already announced to the Department by cable, was sustained, and a measure having the President’s approval, passed.

The lengthy translation of this message has been prepared for the Department because, besides being unusual for Cuban Executives to present arguments to Congress in this manner, it furnishes in as succinct form as is likely to be obtained, the viewpoint of the Government on taxation problems of the country, and therefore is of interest and value.

I have [etc.]

William E. Gonzales

[Enclosure—Translation]

Presidential veto to the loan law

To the House of Representatives:

I have the honor of returning to the honorable legislative body from which it proceeds and with the objections appearing to me, the bill authorizing the issue of bonds up to 30,000,000 dollars, which was submitted to me, as provided in the Constitution, on the 12th instant.

The time which has elapsed since a great problem of public order, internal first and international war afterwards, brought a serious financial crisis to our Republic, has somewhat diminished in the minds of everyone the nature of the pending problems, and it is well that we recall the facts in order to appreciate to their full extent the obligations we are endeavoring to meet.

Since the beginning of the month of February, the execution of the budget—which is defective in itself—suffered a serious interruption, as it was the budget approved in the fiscal year of 1914 to 1915 and extended in accordance with the laws in force. By means of the law of March 7, it was necessary to authorize the Executive to suspend the application of the budget and authorize him to dispose of the funds in the Treasury to meet the needs arising from the military rebellion.

The principal thing then was to maintain public order; the budget was strictly limited to the fulfilment of the ordinary obligations expressly set forth in same, suspending the application of the laws and special credits, which constitute a special budget of the legislative body already (it can be said) traditional among us.

During such an abnormal situation and while suffering from the ravages of the civil war, we were confronted with the international war, and I was authorized by the joint resolution of April 7, to dispose of the Nation’s land and naval forces as I thought fit, using the existing forces, reorganizing same or creating others, and to dispose of the financial resources of the nation to the extent that the needs demanded.

For these reasons, without making use of the powers conferred, I addressed Congress on April 18, requesting it to join in the task imposed upon me, and asking that I be allowed to create taxes to meet the needs resulting from both wars and other obligations of the Treasury; I did not limit my request to the issue of bonds (as the financial administration is authorized to do so in any serious emergency) but asked assistance from the financial resources of the nation—as set forth in the joint resolution—in the two ways of obtaining same, namely, by taxation and by making use of the nation’s credit in order to collect funds, as neither way, if taken separately, would suffice to meet the great public requirements already existing, and other permanent needs to come, as the obligations of the treasury of a nation and national needs never return to what they were prior to great historic happenings.

An unmistakable exposition of this situation is set forth in the decree of May 26, intended to arrive at a definite conclusion in the matter. In said decree it is stated that the taxes are intended to cover the interest and amortization of the floating debt and to provide the Public Treasury with permanent means; and in case it was not thus stated, it could be so clearly understood from the kind and nature of the taxes which were to be imposed.

It is not possible that the Nation rely only upon its credit for the fulfilment of its obligations. In all loans or extension of time for the payments of debts there are two volitions (meaning that of the debtor and that of the creditor) and when the big nations of Europe and America, in which the transactions of capitals really exist, have found themselves tangled up in the awful struggle which actually absorb their activity and energy, they all have appealed to the taxable resources, imposing them as far as they can resist. Bond issues, hypothecation of securities, direct and indirect taxes, charges upon circulation and consumption, suspension of free trade, limiting trade competition, all kinds of monopolies are created, and this is the way that the problem is solved in the free countries of North America as well as in the autocratic countries of Europe and Asia. The United States have started in the great struggle by authorizing the disposal of an amount up to $10,000,000 and by fixing taxes up to $1,800,000,000 per year.

It is not therefore an unusual thing that the Republic of Cuba should need, besides the authorization for the disposal of an amount up to $30,000,000, ways and means that may, during the disposal of the bonds, bring in about ten or twelve million dollars, three millions of which are required for a special purpose. Our public finances can well stand it, as our international commerce in 1916 amounted to over $600,000,000; and the amounts consigned in our budget, with the exception of those applied to our foreign debt, run through all the arteries of our social body especially in the shape of salaries.

A proof that we require permanent funds to meet current needs, because they consist of permanent services which tend to increase instead of diminish, is the increase of salaries to public teachers, which is not provided for in the present budget, because the law ordering that the salaries be paid from ordinary public incomes (and not from the surplus from salaries of employees of Public Instruction as previously ordered) was not duly adopted until January of the current year. Said increase amounts to $1,737,719 a year. During the last days of the past session Congress voted a law creating 972 schools of elementary instruction, thereby increasing the liabilities of the Treasury in more than a million dollars. Including other less important appropriations, the new expenses for Public Instruction amount to nearly $3,000,000 a year.

The annual credits of the fixed budget have also been increased by additional salaries of Senators and Representatives and of the employees of the Judicial Power. Big subventions for railroad companies in the Provinces of Pinar del Rio, Santa Clara and Camaguey have been approved, and it is further necessary, as was noted in the last campaign, to construct the central road and to repair the existing roads, which were poorly constructed and are now very deteriorated by the productive, but destructive, traffic of the sugar mills. By taking a look at the figures contained in my message to Congress in regard to the current budget, it will be seen that the credits for Public Works services amount to millions of dollars, and which were not included in said budget because the income is insufficient (in spite of the maximum output which has been reached in the past years) to cover so many and so heavy obligations.

It is very important to note that the income is not reduced in the current budget so as to leave a fictitious surplus, but is included in its highest yielding under the present special circumstances, and that the expenses reach the same amount as the income, giving an exact balance; it can thus be seen that there is no margin for unexpected payments from Treasury funds not available.

Congress has thought fit to cancel in the expense column the sum of $1,841,736.66, being the amount required for amortization and interest during the fiscal year of a part of the 5,000,000-dollar bond issue of January 1, 1915, authorized by the financial defense law of October 1914, based upon the fact that the bonds of the new 30,000,000-dollar issue may among other things be exchanged for the outstanding bonds of said issue; but the exchange thereof depends upon the will of the bondholders and they are not obliged to do so; further, the amount included in the budget can not be disposed of only to the extent the creditors may desire. It is an eventual resource which can not be counted upon.

I forgot to note, among other credits, the increase of salary to the diplomatic and consular officers on account of the war and the $675,000 just voted for the pavement and sewerage of streets in Matanzas and Cardenas.

Another reason for the unavoidable increase of public expenses and for providing the National Treasury with ample resources, is the high cost of provisions in European and American markets, including both natural products absolutely necessary for living, and manufacturing products. The food for the soldiers and animals of the Army and for all of the other branches of the Government; the remounting of the cavalry; the large quantity of articles and provisions used up in other establishments of the state, such as hospitals, asylums, jails, penitentiaries, public offices, etc., in short, the high cost of all materials, which is one-half of the public consumption and which the amounts included in the budget have not been able to meet, require large sums of money just to modestly maintain ordinary services.

This is why I requested ordinary and extraordinary resources: the latter for transient needs, as those depending upon special circumstances, such as the increased price of provisions absolutely necessary for living, both human and animal, and those consumed by the public administration in its numerous and extensive services. These could be met by the special tax on sugar, 10 cents per bag, besides the additional tax fixed by the House of Representatives upon molasses per gallon (which, in the opinion of the Government should not exceed ¼ cent per gallon) and the other needs pertaining to permanent and definite services, which tend to increase instead of diminish, such as the $3,000,000 for Public Instruction, the great number of credits for developments and public works in general, those for Sanitation and Charity, Legislative and Judicial Powers, could be covered by the ordinary tax on sugar, of 10 cents per bag, and by the impost upon firms and corporations referred to in the decree, leaving the remaining taxes, such as stamps and other, for the payment of interest on the floating debt and yearly amortization, as it is a sure thing that said floating and temporary debt can be converted into a consolidated perpetual debt, that will relieve the public obligations and will be up to the standard which our Republic has been able to attain in the financial markets of the world, thanks to the sacrifices it has always been willing to suffer in order to fulfil its internal and external obligations.

The bill which I respectfully return has deviated from the decree of May 26, which fact is an important precedent in this matter, as well as from the bill approved by the House which, in different ways, tended to meet the needs of the Treasury. It furnishes the Government just the funds strictly necessary—if the crops don’t diminish—for the interest and amortization of the floating debt, just as if all the needs of the Treasury were reduced to the issue of the $30,000,000 to the ends set forth in paragraphs 3 and 4 of Article 1 of the bill. For interest and amortization alone there will be needed, from January 1, 1919, more than $5,000,000, and at that time it is probable that the income from taxes will have decreased, as the production and industrial profits, due to the special circumstances created by the European war, will have decreased. In order to further curtail the resources requested, the Executive has been deprived of the discretional powers, which in such cases all the governments of the world need and must have, and contrary to the precepts of the accountability law, a special cash fund is created, appointing inexorable guardian of the Treasury and even as criticiser of the acts of the head of the Executive power, a subordinate employee of a Department of the Government, such as the Treasurer General of the Republic, which fact is clearly set forth in Article 5 of the bill, which reads:

The incomes from the fixed taxes will remain as deposits in care of the Treasurer General of the Republic, against which no amounts can be drawn nor any sum disposed of, only for the payment of interest and amortization of this debt, as well as to pay the expenses in connection with the collection of the taxes. Consequently it is prohibited to transfer or dispose of the funds in question in any way, not even for the payment of other services that may be of a like nature to those authorized, excepting what, may be ordered in the future by special laws of Congress for the disposal of the surplus that may result.

In this way the President is tied up ,whereas on the other hand he was fully empowered by the joint resolution of April 7, and a special law is voted contrary to the general rules of public accounting, in connection with the emergencies and needs created by the state of war and international relations never before seen in the history of the world.

The impost on companies and corporations is increased to 20 per cent, so that on a basis of an actual income of $1,200,000 it will yield $240,000 more, and with other additions made will not exceed an increase of $600,000, or three times as much—or about $2,000,000—with others that may be added. The other taxes authorized are complementary and will only afford resources for the administration and collection of the imposts, without adding any important amount to the Public Treasury.

But above all, Article 5 above quoted, does not provide for any of the constant public needs derived from the budget and other special laws, nor does it make any allowance for the increased prices of materials to which I have referred in this message.

In my opinion there are important objections to be made in considering the tax fixed by the bill—

on the first transportation of sugar, at the rate of 1 cent for each arroba (25 pounds), it being understood that when the mill pays the planter in cash for the arrobas (25 pounds) of sugar which he is to receive, it will have a right to deduct from the price as many cents as arrobas (25 pounds) he is entitled to; and should the mill pay the planter with sugar instead of cash, the tax will be for the account of the party in whose name the sugar is delivered.

The tax herein fixed will be paid by owners of sugar mills or their representatives, upon transportation of the sugar from the sugarhouse to the wharves or warehouses, upon the presentation of a sworn statement to the administration of rentals of the corresponding fiscal zone.

The hurry with which said article was framed is undoubtedly the cause of its confusive meaning, which should be avoided in framing tax laws, which private interests always try to dodge. In the first paragraph two possible things are stated: first, that which refers to the mill paying the planter in cash for the arrobas (25 pounds) of sugar he is entitled to; second, when he pays him with sugar. In the first case the mill will have the right to retain from the price as many cents as arrobas (25 pounds) the planter is to receive; in the second case the party receiving the sugar is to pay the tax. But it results in a conflict with the following paragraph which, in a general sense, states that the tax thus fixed will be paid by the owners of the mill or their legal representatives upon transportation of the sugar from the sugarhouse to the wharves or warehouses; therefore the planter in this case is completely discarded and there is no distinction made when paying in sugar or when paying in cash; still more so, when the owners or legal representatives are in charge of the collection and make the sworn statement before the fiscal zone, which is to serve as a base for the amount of tax to be paid, without the planter intervening at all.

It appears that the tax has a bearing upon the circulation of sugar, as it is fixed upon the first transportation of sugar from the sugarhouse to the wharves or warehouses; but as sugar is also transported directly from the sugarhouse to foreign countries or is sold for immediate consumption or to local refineries, without passing through the wharves or warehouses, it would thus not pay any tax. The place where the factory is situated, which is an important factor, is given no attention in connection with the tax. As a law is only effective when it clearly defines or creates obligations, with effective sanction and well-defined responsibilities, it is really anomalous that the owner of the mill is the one to make the sworn statement and pay the tax, and be granted the right to transfer same, retaining from the planter who gets cash for his sugar cane, 1 cent for each arroba (25 pounds) of sugar, and the planter who is paid with sugar is fully responsible for the payment of the tax, being the case that the former, the planter that is paid in cash, has nothing to do with the first or following transportations of sugar, as he is left free from all responsibility with the administration; but the planter who is paid with sugar still remains in touch with the exchequer and with his sugar encumbered, subject to the results of the sworn statement submitted by the owners of the mill.

By all means the legal text is really doubtful, and nothing should be clearer, from a sound administrative and fiscal principle, than the reason for taxation, the party who is to pay the tax, and the financial responsibilities of the taxpayer.

If with such phrases the bill has tried to dodge any prohibition of fixing a tax on sugar, it is based on an error, as there is no legal precept that excludes any special industry from the obligation of paying taxes to the state in order to raise funds to meet public obligations; the constitutional precept which obliges all citizens to contribute in proportion to their income, is universal. It would be necessary that a very clear exception be made in order to exclude the sugar industry from contributing in any of the forms established. As there is no exception made, no limit should be recognized that might tend to modify the constitutional rights of the nation. Further, it would be contrary to all financial principles in regard to taxation, to suppose that by merely changing the tax’s name and baptizing it with the name “the first transportation of sugar,” the nature of same would be changed and would not be considered as the same tax from a financial as well as fiscal viewpoint.

Sugar will always be well taxed, no matter if the tax is fixed upon leaving the machinery in which it is manufactured or at any other time. The only difference between the decree of May 26 and the bill is that the former considers the product already finished, namely, packed, which is an unavoidable industrial process, whereas the first transportation to wharves and warehouses is an act of secondary importance or complementary (if you so desire to call it) without any fixed time for doing so, which can be evaded by the manufacturers, giving way to investigations and vexation against the taxpayers, more so when a distinction is made between the planter who collects in cash, whose tax is withheld by the owner of the mill, and the planter who is paid with sugar and has to pay the tax.

The facts submitted are obvious and it is also obvious to meditate over the two parties mentioned in the bill. In the manner in which the tax is fixed, the Government would be required to study in each case the financial and legal relations existing between the sugar manufacturer and the sugar-cane planter, relations which are so different and complex that in order to ascertain their nature the services of technical men—who are hard to find—and a long while to fix the tax, would be required.

The manufacturer may be one man or a corporation; he may be the owner or lessee of the mill, including or excluding the surrounding lands for the cultivation of sugar cane; he may cultivate his lands under administration, lease them, or go into partnership; he may collect the rents in cash at a stipulated price, leaving the planter at liberty to sell his crop at a current or stipulated price, or fixing a cash rental with the obligation of selling his cane to the manufacturing lessor at a price agreed beforehand, in which the rent has been deducted, taking over the cultivated cane at a price previously agreed upon or giving a certain number of arrobas (25 pounds) of sugar for the usual quantity of sugar cane in that kind of transactions; in short, all kinds of combinations, with inexhaustible inventive spirit of profit, can be made, based upon the liberty of contracting and upon the nature of the relations existing between the manufacturers and planters.

If the object of the bill is to fix the tax in such a way that the planter will be the one to pay it, the legislator has put himself in a forbidden sphere of action, so far as the financial organization is concerned, based upon the liberty of contracting, as the transfer and diffusion of the tax is in direct relation to the value; at the moderate rate of 10 cents per bag in normal times, there will be no discussion; the difficulty of solving the problem arises when higher taxes are imposed.

Only in regard to indirect taxes, such as customhouse duties and alike, does the legislator consider the transfer to other economies; namely, he admits that the taxpayer, viz., the merchant, transfers to other merchants, and these to the consumers—who are in definite the taxpayers—the amount of the tax which he advances together with the interest and profits in relation to the capital invested.

In all other cases the administration leaves to the liberty of contracting the evolution relative to the repercussion, diffusion, and incidence of the taxes. Restraining measures in this kind of matters do not work.

The tax on molasses, which the bill fixes as an ordinary tax, was accepted by the administration when the House submitted it as a special tax, but was reduced to ¼ cent per gallon, which would yield an income of $300,000 more or less, that merits taking advantage of the present high price of said product—which is an annex to the sugar industry—although, so far as our allies are interested in this business, we must remember that it is a raw material used in the manufacture of powerful explosives. If the tax is raised to 2 cents and is considered as an ordinary or long-period tax—at which it is excessive—tax on molasses would have no value in normal times.

Another tax worthy of attention is that which is fixed upon the transfer, adjudgment, and foundation of chaplaincies, charitable funds or establishments, mine specifications, and religious entailments. Its nature is that of a confessional tax; in other words, it tends to encumber religious institutions of a fixed class and in a disproportionate manner and in general contradiction with our tax system, as it encumbers the capital, and not the profits, rents, incomes, nor the actions of citizens, exclusively affecting the Catholic Church, which maintain such institutions. The chaplaincies are intended for different purposes, which are not necessary to define; they do not belong among the patrimonial estates; as a rule they are founded upon consignative or reservative mortgages, the constitution and transfer of which, among living persons or mortis causa, is subjected to the liens on transmission of property, a very old impost among us, not constituting any other legal precept as they are not even mentioned in our civil code, which does not recognize any kind of entailments, not even trustees, only in a very limited manner. In our Republic the church is entirely separated from the state; it exists with common rights, and it is not just to impose special taxes upon same, just as if we were coactively trying to impair institutions which maintain a worship acknowledged by the Constitution and which is protected by the equality of principles before the fundamental law of our society.

The bill has wholly done away with the stamp taxes. They were included in the decree of May 26 and in the bill of the House with a few changes. They have been attacked without reason and have even been censured because of their existence during the Spanish domain, as if in case they should be considered as a defect, they would not also be a vice of common origin in our tax system, because the Republic has not invented the customhouses, the postage stamps nor the industrial taxes, nor the land tax, nor the lottery nor any of the other kinds of revenues which constitute the fiscal patrimonies of our cities, provinces and National Government.

They were not invented by the Spanish colonial system: they are a universal tax system, which exists in the five continents of the world and in all kinds and systems of governments, from the most absolute autocracy to the most advanced democracies, under different forms and processes, but nearly alike. Even the lottery, which is rejected in many civilized nations, is admitted as a means of creation and extinction of obligations in different ways.

In the United States and Mexico, in all Central and South American countries, in Europe and Asia, the stamp tax has been extraordinarily developed in the past years, and there is no reason why Cuba’s sovereignty should be limited, depriving her from a healthy and abundant source of income, when her needs grow as her population increases, and when public incomes are democratically invested in great public services for the benefit of the people, in hospitals, schools, asylums, aqueducts, roads, etc. Such are the fruits of our tax system, and not the greedy exploitation of a conquered or enslaved country.

Naturally, Cuba is not a colony nor an enslaved country, but an independent and sovereign nation, which expends her incomes in her benefit, through an administration which is neither a public calamity nor a parasite plague, but is an organization perfectly identified with the social mass, of which it is an integral part, poorly remunerated in many cases, but with sufficient probity to maintain her public incomes at a high yielding, such as the custom revenues and all other incomes. It would not be fair criticism to compare us with the English colonists, who in defense of a constitutional right, and not against a rapacity that did not exist, first protested and afterwards revolted against the foundation of public rights which George III and Lord North favored in the [eighteenth] century. We breathe the ambient air of American democracy of the twentieth century.

What made the stamp tax and stamped paper specially hateful during the old régime, was its exaggeration; it is enough to say that poor people’s paper was worth 10 cents; that used in making petitions—and it was required to apply in writing for everything—cost 37½ cents; those for judicial proceedings, without limited quantity, $1.10; for important lawsuits it was worth $1.80 per sheet, and for contracts the stamped paper ranged up to $50.

In many cases rentals were collected by lessees, and the states severely persecuted the taxpayers with vengeance, who, notwithstanding this fact, did not receive in exchange for their sacrifice the services that our public administration freely renders to all social classes.

The minimum rates fixed by the decree of May 26 and the nature of the acts affected by the tax, show that the tax fixed is not violent nor seditious; it is just a road leading to new taxes, derived from the necessity of giving some variety of form to the incomes and to prepare the era of social wealth so characteristic in our times. To only depend upon the custom revenues to meet public expenses is to fluctuate within the moral story of the “seven fat and beautiful kine and the ill-favored and lean kine,” and to oppress the popular classes of our society under the pressure of a system that draws out of the people the principal public incomes. Cuba is a very progressive country of Latin America in social structure; no country of the Iberian race in both hemispheres has such a strong and progressive sugar industry as ours, and there are not many countries ahead of us in the industry of cigars, besides many other small industries, rural and urban, agricultural and manufacturing, as cattle raising, cultivation of tobacco and others. In order not to fall back we have to raise the intellectual level of our people, extend our land communications, construct lighthouses, illuminate our coasts, in short, we have to maintain our national standard at a height exacted by our geographical situation in one of the greatest world crossways of our contemporary civilization. Let no one say of Cuba, after two or three generations of independent life, what criticizers say of old Spanish-America, that after a century of independence still lives after the old colonial style, and that those republics are still countries of masters and slaves and not of free men.

The small impost upon memo-books where purchases on credit are noted, has deserved special criticism, same being defended by the administration not on account of its yielding, but for its social tendency. Ordinary purchases on credit of daily consumption goods, instead of exalting, depress the labor class as well as the middle class in its relations with the wealthy class. All the reforms and improvements which have raised the moral level of the urban and rural inhabitants of the new and the old world, are due to the use of money and to the association based upon cash payments. The European cooperative system, specially the English, has had for basis the cheapening of goods of daily use in life and of raw materials for manufacturing industries, by having the labor associations pay in cash. The syndical agricultural credit, the credit institutions founded in Europe to support small industries and small rural property, have no other object.

The purchases on credit maintain in our farms the “truck system,” namely, payments are made with merchandise by means of chips, vouchers, memo-books, etc., which serve to receive credit in special financial institutions; in the cities the workman does not form an economical entity in the technical meaning of the word; he lives on the purchases, which take up every day a few more lines in his credit book and closes upon settlement on pay day, when he sees the earned dollars pass before his eyes without getting into his pockets, leaving always a debit balance which chains his liberty and deprives his family from the sense of provision and saving.

This is why currency accumulates in the banks, which in all civilized nations pass from hand to hand to support the circulation of domestic provisions and of small transactions; this diminishes public interests and increases the liens of the social mass, as the Public Treasury is deprived of the legal resources to which it is entitled from the profits of the minting of silver and fractional coins. It has not been possible in Cuba to put in circulation the amount of money called for in the monetary law, because the commercial customs eliminate small divisions. Thus, in every article, no matter how insignificant it may be, there are always two profits: one, that of the usurer, which depends upon the money advanced by the merchant to supply himself with merchandise; the other of a mercantile nature, derived from the commercial profits of supplying the consumer, with the further advantage that said predomination on the part of the intermediator gives the latter the selection of the merchandise and the fixing of prices. The new tax is a way of knowing this fact in its full extent, and a trial to endeavor to remedy the same, thus making more solid our monetary system.

The remarks given are sufficient to show the deficiencies of the bill. In fact, they depend upon the nature of things, as stated in my decree of May 26, namely: “The solution of such complex problems as the budgets is difficult for the deliberating bodies, such as those that constitute the national legislative representation.”

Previous to my message of April 18 I had the honor to state that in normal times it would have been plausible to submit to the honorable Congress a complete technical and practical study of our tax system, of our social structure, and of our political constitution, in order that the legislative power, with its culture and deliberate study would select the just and most convenient solutions, so that the tax system shall be based upon a solid foundation in relation to our needs and the public welfare. But at the present time, with just the necessary delay, we hardly can submit a list of taxes that might apportion means and resources, because a prompt and effective measure is required.

Let it be said openly, that it is a serious error to regulate and limit the powers of the Executive, as it is done in the bill, at a time when free action is most necessary, a fact that is acknowledged in the joint resolution. The fixing of taxes without any sanction and in erroneous terms would bring results contrary to those sought.

This is why I make those objections, insisting in that neither the whole bill nor any of its details satisfy public needs, and I therefore recommend that the joint resolution of April 7, with the use I have made thereof, be left in force, and that the honorable Congress may consider more calmly the pressing and urgent measures required.

Presidential Palace, Habana, July 19, 1917.

M. G. Menocal