By Annapaola Llanas Mejía y Jesús Rodolfo Jiménez Andrade
Since the present is borne of the past, it is of great importance to know and learn lessons derived from experience in order to face current circumstances and, at the same time, set the foundations for the future.
To understand the current tax situation, one must go back to the origins of the income tax (IT). The consequences of tax policy must be taken into account because they are highly significant to life in the nation, for taxes have undergone major changes to adapt to the dynamism of Mexican society and to address factors not previously considered.
The antecedents of taxation
The direct antecedent of the income tax dates back to 1921, to the Centennial Act (so named because it was enacted during the 100th anniversary of Mexico’s Independence), which went into effect on July 20 of that year. The law was promulgated by President Álvaro Obregón and Finance Minister Adolfo de la Huerta.
This tax was of a temporary nature, being in effect for only five months, during which time it brought in to the treasury 1,078,000 pesos.1 The amount was earmarked for the acquisition of ships for the nation’s merchant marine and for improvements to commercial ports to improve Mexico’s maritime communications.
The law was divided into four chapters known as cédulas or schedules: 1) the tax year of trade or industry, 2) the tax year for one who is self-employed or in a literary, artistic or unnamed profession, 3) salaried professionals, 4) placement of money or securities for profit, equity or dividends.
The tax was based on gross income. Those subject to the tax were both Mexicans and foreigners, provided that their source of income was located within the nation. Each cédula or schedule had its own rate divided into three or four categories. The rates ranged from between 1% and 4% for schedules s one and two, and 1% to 3% for schedule three. The calculated tax had to be paid in the first two weeks of September of 1921 by use of canceled stamps bearing the word Centenario.
On February 21, 1924, while Álvaro Obregón was still president and his finance minister Alberto J. Pani was still in office, a law similar to the Centennial Act was created, although it was of a permanent nature: the Law for the Collection of Taxes Established in the Law of Income in Effect upon Wages, Salaries, Emoluments, Fees and Profits of Companies and Businesses.
As Treasury Secretary, Pani’s essential objective was to amend the economic errors caused by the prior secretary (by turning a growing deficit into a surplus), which is why the tax reform planned by the new treasury policy and the previously mentioned tax was created as a regulatory crux. Pani dared call this treasury policy “the New Regime” because in the tax and banking sectors there was a tendency toward the equitable redistribution of taxes and the democratization of credit, which for the first time went against the Porfirian tendency that favored a small group of the rich to the detriment of the lower classes2.
1 José Iturriaga de la Fuente, La revolución hacendaria, México, SEP, 1987, p. 76.
2 Alberto J. Pani, Apuntes autobiográficos, México, Instituto Nacional de Estudios Históricos de la Revolución Mexicana, primera edición facsimilar, 2003, tomo I, p. 332.
As the name of this regulation indicates, a chapter or schedule (cédula) was set up for individuals who obtained income from their work in the form of wages, salaries, fees or emoluments, and another schedule for companies and businesses. From that moment on and for the first time in history, the employers retained their salaried employees’ taxes, and they were responsible for the payment of these taxes. Thus, they served as assistants to the tax authorities by exercising powers of surveillance and control. This was very useful and practical for the authorities, since they could focus only on employers rather than on each particular employee. The income earned from personal employment was taxed using progressive rates, which ranged from 1% to 2% (lower than the percentages of the Centennial Law), with a steady increase in the tax base.
As to the income tax for companies and businesses, it was determined according to the profit earned in cash or in kind for one year, excepting those that originated through agricultural deals belonging to private individuals.
Specified in the regulations were the types of taxpayers, the way in which the statements should be filled out, and how to make the tax payment. Companies had to make a temporary payment (as it is still done) in the first semester. The final statement had to be delivered in January, unlike now when it is done in March.
This tax also was to be paid with stamps, and the statements were to be submitted on the forms approved by the recent Ministry of Finance and Public Credit (SHCP). At that time a deadline of up to five years was established for the government to collect fines, surcharges and taxes, which gave rise to the concept of expiration and prescription. Of all taxes collected, 10% was given to the federal entity and another 10% to the municipality where the taxable income originated. Through this law, the first experiences were gained that helped set the foundations for a new methodology for a new tax.
Design and origin of the income tax
On March 18, 1925, President Plutarco Elías Calles and Alberto J. Pani, the Secretary of Finance and Public Credit, enacted the first Income Tax Law. The law was in effect from 1925 to 1941, and over the years sustained a series of changes to adapt it to the economic phenomenon that the country was witnessing.
During this period the special idea of “tax participation” was perfected. Established in the 1924 law, it specified that 10% went to the local state and 10% to the municipality, on the condition that these entities not tax the same sources of wealth as the Income Tax Law did, and if they were taxed by municipalities or federal entities, these would reduce their rates by an amount equal to 10% allowed by the federal government. This avoided concurrent taxation (federal, state and municipal) of the same taxable item.
At that time taxpayers could choose a payment method as it could be done with stamps, cash or in any other form specified in the regulations.
As time passed the number and scope of the cédulas was modified. When the criteria and specifications grew, these schedules increased to seven: 1) trade, 2) industry, 3) agriculture, 4) capital imports, 5) exploitation of the subsoil or concessions granted by the state, 6) salaried employees, and 7) professionals, craftsmen and artists.
The regulations specified the allowable deductions, the rules regarding the statements that taxpayers were required to provide and the deadlines for submission, as well as the requirements that had to be met for the deductions for “dependents.” It established the need to accumulate the income earned from two or more companies that were taxed within the same schedule and which belonged to the same owner (similar to the current consolidation regime).
In that period it was noted that there was already a clear distinction among taxpayers and that proportionality and fairness would exist in the collections, as the Constitution calls for now, given that if assets increase, it is required that a tax be paid, regardless of the size of the taxpayer.
Since then, and thanks to the foundations that were set with the creation of this tax, an ability to adapt was allowed. In particular, the intrinsic capability to adjust the tax to the economic conditions of Mexican society that have periodically shaped the particularities of the environment. Each time that a rule modification is needed, it is the same original foundations that shape it.
Reflections on the adaptation of the tax
Since its creation, the income tax has undergone considerable changes, which range from an elementary model of a temporary tax to a modern tax model and whose complexity is proof of its permanence. The success of the Calles and Pani income tax is such that it is now the most important non-oil revenue source for the treasury.
The law became a very useful extra tool for obtaining resources and balancing government budgets, as it afforded procuring the resources needed to balance expenses and revenues, as well as to build roads and irrigation works.
The tax policy of the government of General Calles, which was created by Pani, is today the scheme that governs national taxation. With his initiative, Pani showed ability and vision in relation to the tax environment, and assurances can be made that from that moment on, a new phase began in Mexico – one in which the permanent search for equitable taxation began, and the type of taxpayer, the source of income, the tax rate, the tax base and the mode of payment are specified in detail.?
Bibliografía
Calvo Nicolau, Enrique. Tratado del Impuesto Sobre la Renta, México, Themis, 1995, Tomo I, 516 pp.
Iturriaga de la Fuente, José. La Revolución Hacendaria, México, SEP, 1987, 150 pp.
Krauze, Enrique. Reformar desde el origen: Plutarco E. Calles, México, Fondo de Cultura Económica, 1987, 154 pp.
Manero, Antonio. La revolución bancaria en México 1965-1955, México, Talleres Gráficos de la Nación, 1957, 354 pp.
Margáin, Hugo B. Compilación de Leyes del Impuesto sobre la Renta (1921-1953), México, SHCP, 1957. 78 pp.
Pani, Alberto J. Apuntes autobiográficos, México, Instituto Nacional de Estudios Históricos de la Revolución Mexicana, primera edición facsimilar, 2003, tomos I y II, 345 y 446 pp.
SHCP, Ley del Impuesto sobre la Renta. Suplemento a la Ley General del Timbre, México, S. Galas, 1925, 148 pp.
To understand our present tax system, one first has to understand the past
Since the present is borne of the past, it is of great importance to know and learn lessons derived from experience in order to face current circumstances and, at the same time, set the foundations for the future.
To understand the current tax situation, one must go back to the origins of the income tax (IT). The consequences of tax policy must be taken into account because they are highly significant to life in the nation, for taxes have undergone major changes to adapt to the dynamism of Mexican society and to address factors not previously considered.
The antecedents of taxation
The direct antecedent of the income tax dates back to 1921, to the Centennial Act (so named because it was enacted during the 100th anniversary of Mexico’s Independence), which went into effect on July 20 of that year. The law was promulgated by President Álvaro Obregón and Finance Minister Adolfo de la Huerta.
This tax was of a temporary nature, being in effect for only five months, during which time it brought in to the treasury 1,078,000 pesos.1 The amount was earmarked for the acquisition of ships for the nation’s merchant marine and for improvements to commercial ports to improve Mexico’s maritime communications.
The law was divided into four chapters known as cédulas or schedules: 1) the tax year of trade or industry, 2) the tax year for one who is self-employed or in a literary, artistic or unnamed profession, 3) salaried professionals, 4) placement of money or securities for profit, equity or dividends.
The tax was based on gross income. Those subject to the tax were both Mexicans and foreigners, provided that their source of income was located within the nation. Each cédula or schedule had its own rate divided into three or four categories. The rates ranged from between 1% and 4% for schedules s one and two, and 1% to 3% for schedule three. The calculated tax had to be paid in the first two weeks of September of 1921 by use of canceled stamps bearing the word Centenario.
On February 21, 1924, while Álvaro Obregón was still president and his finance minister Alberto J. Pani was still in office, a law similar to the Centennial Act was created, although it was of a permanent nature: the Law for the Collection of Taxes Established in the Law of Income in Effect upon Wages, Salaries, Emoluments, Fees and Profits of Companies and Businesses.
As Treasury Secretary, Pani’s essential objective was to amend the economic errors caused by the prior secretary (by turning a growing deficit into a surplus), which is why the tax reform planned by the new treasury policy and the previously mentioned tax was created as a regulatory crux. Pani dared call this treasury policy “the New Regime” because in the tax and banking sectors there was a tendency toward the equitable redistribution of taxes and the democratization of credit, which for the first time went against the Porfirian tendency that favored a small group of the rich to the detriment of the lower classes2.
1 José Iturriaga de la Fuente, La revolución hacendaria, México, SEP, 1987, p. 76.
2 Alberto J. Pani, Apuntes autobiográficos, México, Instituto Nacional de Estudios Históricos de la Revolución Mexicana, primera edición facsimilar, 2003, tomo I, p. 332.
As the name of this regulation indicates, a chapter or schedule (cédula) was set up for individuals who obtained income from their work in the form of wages, salaries, fees or emoluments, and another schedule for companies and businesses. From that moment on and for the first time in history, the employers retained their salaried employees’ taxes, and they were responsible for the payment of these taxes. Thus, they served as assistants to the tax authorities by exercising powers of surveillance and control. This was very useful and practical for the authorities, since they could focus only on employers rather than on each particular employee. The income earned from personal employment was taxed using progressive rates, which ranged from 1% to 2% (lower than the percentages of the Centennial Law), with a steady increase in the tax base.
As to the income tax for companies and businesses, it was determined according to the profit earned in cash or in kind for one year, excepting those that originated through agricultural deals belonging to private individuals.
Specified in the regulations were the types of taxpayers, the way in which the statements should be filled out, and how to make the tax payment. Companies had to make a temporary payment (as it is still done) in the first semester. The final statement had to be delivered in January, unlike now when it is done in March.
This tax also was to be paid with stamps, and the statements were to be submitted on the forms approved by the recent Ministry of Finance and Public Credit (SHCP). At that time a deadline of up to five years was established for the government to collect fines, surcharges and taxes, which gave rise to the concept of expiration and prescription. Of all taxes collected, 10% was given to the federal entity and another 10% to the municipality where the taxable income originated. Through this law, the first experiences were gained that helped set the foundations for a new methodology for a new tax.
Design and origin of the income tax
On March 18, 1925, President Plutarco Elías Calles and Alberto J. Pani, the Secretary of Finance and Public Credit, enacted the first Income Tax Law. The law was in effect from 1925 to 1941, and over the years sustained a series of changes to adapt it to the economic phenomenon that the country was witnessing.
During this period the special idea of “tax participation” was perfected. Established in the 1924 law, it specified that 10% went to the local state and 10% to the municipality, on the condition that these entities not tax the same sources of wealth as the Income Tax Law did, and if they were taxed by municipalities or federal entities, these would reduce their rates by an amount equal to 10% allowed by the federal government. This avoided concurrent taxation (federal, state and municipal) of the same taxable item.
At that time taxpayers could choose a payment method as it could be done with stamps, cash or in any other form specified in the regulations.
As time passed the number and scope of the cédulas was modified. When the criteria and specifications grew, these schedules increased to seven: 1) trade, 2) industry, 3) agriculture, 4) capital imports, 5) exploitation of the subsoil or concessions granted by the state, 6) salaried employees, and 7) professionals, craftsmen and artists.
The regulations specified the allowable deductions, the rules regarding the statements that taxpayers were required to provide and the deadlines for submission, as well as the requirements that had to be met for the deductions for “dependents.” It established the need to accumulate the income earned from two or more companies that were taxed within the same schedule and which belonged to the same owner (similar to the current consolidation regime).
In that period it was noted that there was already a clear distinction among taxpayers and that proportionality and fairness would exist in the collections, as the Constitution calls for now, given that if assets increase, it is required that a tax be paid, regardless of the size of the taxpayer.
Since then, and thanks to the foundations that were set with the creation of this tax, an ability to adapt was allowed. In particular, the intrinsic capability to adjust the tax to the economic conditions of Mexican society that have periodically shaped the particularities of the environment. Each time that a rule modification is needed, it is the same original foundations that shape it.
Reflections on the adaptation of the tax
Since its creation, the income tax has undergone considerable changes, which range from an elementary model of a temporary tax to a modern tax model and whose complexity is proof of its permanence. The success of the Calles and Pani income tax is such that it is now the most important non-oil revenue source for the treasury.
The law became a very useful extra tool for obtaining resources and balancing government budgets, as it afforded procuring the resources needed to balance expenses and revenues, as well as to build roads and irrigation works.
The tax policy of the government of General Calles, which was created by Pani, is today the scheme that governs national taxation. With his initiative, Pani showed ability and vision in relation to the tax environment, and assurances can be made that from that moment on, a new phase began in Mexico – one in which the permanent search for equitable taxation began, and the type of taxpayer, the source of income, the tax rate, the tax base and the mode of payment are specified in detail.?
Bibliografía