Papers Relating to the Foreign Relations of the United States, 1918
File No. 837.51/267
The Secretary of War ( Baker) to the Secretary of State
Sir: I beg to acknowledge yours of August 31, 1917,1 in which you request that one of the financial experts of the Insular Bureau of this Department be directed to examine certain financial data submitted by the Cuban Minister relating to a proposed Cuban loan.
I return herewith the enclosures received with your letter with a memorandum from the Chief of the Bureau of Insular Affairs on the proposed loan.
Very respectfully,
The Chief of the Bureau of Insular Affairs ( McIntyre) to the Secretary of War ( Baker)
The Cuban Government by a law of July 31, 1917, provides for the issue of not to exceed $30,000,000 gold bonds bearing interest not to exceed 6 per centum per annum, payable semiannually. The bonds are payable by drawing; and are to run for not to exceed 12 years. Article 2 of the law creates certain taxes for the payment of the interest and principal of the bonds authorized, as well as to increase the revenue made necessary by the state of war and the requirements of the Treasury.
The Department of State requests an examination of the data submitted by the Cuban Minister relating to this law in order that the Department may be advised whether the proposed loan may be properly authorized as coming within the terms of Article 2 of the treaty of 1903 between Cuba and the United States, which provides that Cuba shall not—
contract any public debt to pay the interest upon which, and to make reasonable sinking fund provision for the ultimate discharge of which the ordinary revenues of the Island of Cuba, after defraying the current expenses of the Government, shall be inadequate.
It is assumed that the revenues provided by the loan law are to be considered ordinary revenues of the island of Cuba. In some of the forms of this bill, prior to its enactment into law, it was provided that the taxes should cease with the amortization of the loan. This provision does not appear in the law as submitted.
[Page 305]Four million dollars of assured revenue, in addition to that necessary to defray the current expenses of the Government, would take care of the proposed loan. The ordinary revenues under laws in effect prior to the passage of the law under consideration were not fully adequate to defray current expenses of the Government, as shown by the fact that there was a loan necessary in 1914, and another loan necessary in 1915.
It is proposed to increase the ordinary revenues from certain taxes provided in the law. These taxes are estimated by the Department of Finance to produce $8,660,000 per annum. The amount estimated is more than twice the amount necessary to care for the loan. Unfortunately, however, the loan is to be used in large part as a basis for increasing the Army and Navy. This naturally increases the future current expenses of the Government.
A definite reply to the inquiry of the Department of State requires the following data: What will be the current expenses of the Government?
While the budget for 1917–18 is submitted, no estimate is submitted of the increased expenditures for future years; and it should be understood that the budget for 1917–18 was prepared prior to the recent troubles in Cuba and the entry of Cuba into the present war. This means that one essential factor necessary in determining whether the increased ordinary revenues after defraying the current expenses of the Government will be adequate to care for the loan is missing. It is reasonable, however, to believe that if, as is estimated, the new taxes will produce $8,660,000 additional revenues, the loan will be cared for by the revenues after defraying the current expenses of the Government.
What will be the ordinary revenues, as increased by the new taxes?
Data is not furnished which would enable one carefully to estimate the revenues that will be produced by the new taxes, as will be plain by examining its items. The largest item is that from the sugar tax, Article 2, Section 2. The Department of Finance estimates the product of this tax to be the following:
20,000,000 bags at 20 cents each, $4,000,000.
The actual product of the tax, had it been in force during the fiscal year 1914–15, would have been:
18,203,922 bags at 10 cents each, $1,820,392.20.
The production for that year exceeded previous records. Certainly the production has been stimulated by war prices, but it may well fall to that record in any year. Furthermore, the tax of 20 cents per bag is contingent on a Habana price of 4.25 cents per pound. It is conceivable, and should be reckoned with, that the price may within two years of the end of the war fall below that. In other words, the sugar tax should be conservatively estimated to produce $2,000,000 per annum and no more.
This item of the new tax is not a heavy one. Cuban sugar is given in the United States market a tariff: preferential of 81 cents per bag. The maximum tax imposed under that law is 20 cents per bag, and when sugar is below 3 cents per pound in Habana it is 10 cents per bag.
The next important item is that of Article 2, third section, estimated to produce $3,000,000 per annum. It modifies General Order No. 463 of 1900, and apparently extends to companies engaged in planting and working sugar and tobacco the tax of 8 per centum of their net profits imposed by that order on certain banks and stock companies. It repeals the exemption of that order in favor of mining companies, and taxes such companies 6 per centum of their profits. In addition, it imposes an export tax of $1 per ton on iron. If this means $1 per ton on iron ore, practically the only form in which iron is exported, it is an unusually heavy tax, being an export tax of approximately 30 per centum ad valorem.
The tax on insurance companies is raised from 2½ per cent to 4½ per cent on premiums collected, and the tax is extended to mutual companies and commissions to agents. The tax laid under this section should produce more than the $3,000,000 estimated. Presumably $750,000 of this will be derived from the export tax on iron ore, and it is probable that this tax may injure the mining industry in Cuba.
The Department of Finance estimates that the 5th section of Article 2, being a tax of 50 cents per hundred pounds of hides exported, will produce a revenue of $100,000 a year. This is based on an estimated export of 20,000,000 pounds of hides per annum. A conservative estimate should not be based on more than 18,000,000 pounds of hides.
[Page 306]It is believed that the estimate submitted by the Department of Finance is a very liberal estimate, and it is, therefore, thought that the large factor of safety apparently resulting is none too great.
Without further analysis it is clear that the revenue product of the new taxes will vary widely from year to year and that while adequate to care for this loan, the surplus after so doing available to supplement the ordinary revenues is problematic.
In conclusion, if the taxes imposed under the loan law of July 31, 1917, are considered ordinary revenues of the island of Cuba then the loan provided in that law will not create a public debt “to pay the interest upon which, and to make reasonable sinking fund provision for the ultimate discharge of which the ordinary revenues of the island of Cuba, after defraying the current expenses of the Government, shall be inadequate”; provided the current expenditures of the Government are not increased beyond the amount provided in the budget for the year 1917–18.
The proviso is the important consideration; and it is believed that the Government of Cuba should be cautioned not to increase, purely for military and naval purposes, unduly its current expenses. The loan creates no difficulties, accompanied as it is by a liberal scheme of taxation, if the current expenditures are not to be unduly increased. The part of wisdom on the part of Cuba would be to limit the loan for the present to the amount necessary to pay the extraordinary expenses resulting from the recent disorders in Cuba, and the debts already contracted for war purposes, and not materially to increase its military establishment bringing with it increased expenditures for future years. One or two years’ application of the new taxes will be required to determine the amount of revenues to be derived therefrom.
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