Nicaragua - The fiscal system

INTERNATIONAL BANK FOR RECONSTRUGTION AND DEV,ELOPMENT MISSION TO NICARAGUA THE FISCAL SYSTEM OF NICARAGUA A Report by George Garvy Advisor on Public Finance to International Bank Mission to Nicaragua J?nuary 23, 1952  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT MISSION TO NICARAGUA THE FISCAL SYSTEM OF NICARAGUA: A REPORT OF THE ADVISOR ON PUBLIC FINANCE Page Introduction 1 Part I. Fiscal Svstem and Revenue Administration 1. Summary A. Present Structure of Nicaraguan Tax System a) The Main Features of the Fiscal System of Nicaragua 3 b) The Main Weaknesses of the Fiscal System 5 a) The Main Objectives of Fiscal Reforms 8 B. Summary of Recommendations a) The Revenue System 10 b) The Revenue Administration 12 2. Government Expenditures and Sources of Revenue a) Government Expenditures 13 b) The Sources of Government Revenue 19 Technical note 25 c) The Structure of the Tax System 28 d) The Incidence of Taxation 31 3. The Tax Administration a) The Collection of Government Revenue 33 b) The Cost of Collection 40 C) Control and Auditing 40 Page 4. Recommended Reforms of the Fiscal System a) Personal and Corporate Income Tax 42 b) Property and Property Transfer and Inheritance Taxes 46 c) Business Taxes 50 d) Excise Taxes and Customs Duties 55 e) Miscellaneous Taxes and Fees 56 f) Nontax Revenue 56 5. Recoamended Reforms of the Revenue A-dministration 57 Part II. The Preparation, Organization and Exeoution of the National Budget 1. Preparation of the Budget 62 2. Organization of the Bud et 66 3. Execution of the Budget 86 4. Recommendations 89 Bibliography 93 - 1 - Introduction This a report for action. As such, no attempt has been made to achieve the academic goals of comprehensiveness and balance. Instead, it is essentially the presentation of a series of recommendations, against the background of a brief analysis of the current situation as seen by the mission of the International Bank. In order to present-to the government of Nicaragua practical recommenda- tions for the most urgent reforms in the field of public finance, the investiga- tions conducted had to be limited in scope. Certain aspects of public finance such as the public debt, national-municipal fiscal relations, the control of expenditures and many other problems, some of which are of considerable importance, have been omitted. The report does not deal with the current budgetary position of Nicaragua- which happens to be the most favorable in many years - or with the problems of a desirable allocation of expenditures, These are problems which have to be solved in relation to the over-all program of economic development which the mission is currently formulating. Since it was our task to develop recommendations for immediate reforms, the report is focused on two problems which call for prompt action: first, how to raise government revenues to a level which .ould permit the government to in- augurate a comprehensive, long-range program of economic and social development. Second, how to budget efficiently to achieve the goals of over-all government policy. The report, therefore, falls logically into two parts, the first dealing with the fiscal system and revenue administration, the second - with the prepara- tion, organization and execution of the budget. The pragmatic approach and the limited time available - the field work in Nicaragua was completed in six weeks - made it necessary to limit the supporting statistical and analytical material to the period since the end of vorld ,ar II. Vhile for some purposes it would be desirable to show trends for a longer period of time, reclassification and recomputation of ori,ginal data gould have required more time and assistance than was available. The report is critical of the Nicaraguan tax system, of its tax administra- * tion and budgetary practices. Since its purpose is to offer constructive and operative recommendations, it deals only with the situation with which -he mission was confronted. It does not probe into history to ascertain when such practices started; nor does it try to evaluate how much progress, if any, has been achieved in recent years. It was neither possible nor appropriate to present ready-made recipes. All recommendations in this report outline the objectives to be achieved and the general steps to be taken. Many of the reforms suggested are drastic. Others involve institutions and procedures which are new to the Nicaraguan scene. There- * fore, additional study and discussion will be required before these reecmmenda- tions can be translated into appropriate legal language and workable regulations. In the case of recommendations dealing with new taxes, changes in rates and in the structure of existing taxes and the revision of the tariff, considerable study will be required to determine appropriate rates and schedules. There is also the problem -2- of timing and of the interrelationship of the recommended reforms. These must be solved by Nicaraguans not be foreign advisers. In this sense, the present report presents a target, not a solution. The specific initial rates will depend very much on the scope and timing of the general development program (and the consequent financial requirements) of the Nicaraguan government, on the :general economic conditions, and on other considerations. Therefore, whenever specific rates or exemptions are mentioned in the report, they are used.only to give nore concrete meaning to such items as "high personal exemption","relatively low basic rate" or 'moderate progression". These rates should not be considered or construed as being specific recommendations of the mission. The present report is based almost exclusively on unpublished accounting records of the !vinistry of Finance and on interviews with a large number of govern- ment officials, business men and informed citizens, both in and outside M5anagua. Source references are, therefore, kept to a minimum, but all adjustments made in official - though largely unpublished - figures are clearly indicated. This report could not have been completed without the valuable assistance and support extended to the mission, and in particular to the author of this report, by Mr. Rafael HuezQ, inister of Finance, Dr. Enrique Delgado, inister of Economy, Mr. Eduardo Casco, Assessor Technico of the Tribunal de Cuentas, Col. ivjia Cham- orro, Director de Ingressosl Col. Thomas G. Davning, Recaudador General de Aduanas, and many others within and outside the kinistry of Finance. To all of them, the author owes a debt of gratitude for their most generous cooperation. -3- 1. SUIARY A. THE PRESE"T STRUCTURE OF TI NICARAGUAN TAX SYSTEI a) The iain Features of the Fiscal System of Nicaragua The present fiscal system of iicaragua is inequitable as well as highly inelastic in the face of rapid economic changes in the country. No systematic effort seems ever to have been made to simplify the tax system by un- ifying multiple taxes levied on the same product, or to remove from the statute books taxes that have proved to be uncollectible or have ceased to be collected for one reason or another. No effort has been made to calculate the net yield to the Treasury of various taxes after collection costs, iost important, there is no evidence of a systematic effort to obtain revenue from individuals or businesses which, in spite of recent substantial rises in income, have remained almost entirely exempt from taxation. The chief criticism of the tax system is that almost no effort has been made to use fiscal policies to stimulate the economic progress of the country. The most striking features of the Nicaragua, fiscal system are: 1, An almost exclusive reliance on indirect taxes and duties falling essentially on consumption. 2. The absence of an income tax. 3. Insignificant direct property taxes. 4. The absence of any progressive features in the system. Since the end of the wrar, import and excise taxes combined have averaged 85 per cent or more of the total net revenue of the government. This percentage declined significantly (to 76 per cent) in 1950/1 only after the imposition of the general 5 per cent export tax and of the :3.00 coffee ex.ort ta;x. This rep- resented the first significant shift avay from heavy taxation of consumption. Internal revenue is obtained from a large variety of taxes, some of which, such as the taxes on liquor, sugar, tobacco ancd cattle slaughter. have been levied for a century or longer. The heavy reliance on import duties for revenue purposes increases the proportion of indirect taxes. 18any of the other indirect taxes, such as stamp taxes, are also borne by consumers. ,he resulting tax burden is heavily regressive, Lven the property tax, traditionally progressive elsewhere, is practically proportional. The property transfer and inheritance tax, the only other direct tax, is strictly proportional. The rudimentary attempts to graduate taxes (such as scaling taxes on admission tickets according to price) are too in- significant to be of any consequence. The taxes on alcoholic beverages and tobacco are the main single sources of revenue from ultimate consumers. -These two taxes yielded prior to 19h9/50 two-thirds of all consumption taxes proper, while taxes on sugar, meat (in the form of a slaughter tax), soft drinks and matches (collected through the match ronopoly) accounted for the remainder. There are no taxes on luxury items or other goods consumed primarily by the higher income groups. The share of liquor and tobacco taxes has been declining (from 86 per cent of all excise taxes in 1945/46 to 77 per cent in 1950/1) because of the introduction of new excise taxes (on soft drinks in 1948/49 and on admissions in 1945/46), even though tax rates on alcoholic beverages and on tobacco have been increased in 1950/1.. The tax on alcoholic beveraes alone has provided more than half of the yield o4 all excise taxes combined. While excise taxes proper accounted for only about one-thire of total tax revenue, there is no doubt that practically the entire burden of import duties and taxes, which in recent years accounted for half or more of tax revenue, was borne by consumers. In the first place, a significant segment of business (foreign mining and other concessions) is exempt from import duties nd some re- lated taxes as well). Thus, between 12 and 20 per cent of dutiable merchandise entering the country w,as imported by concessionaires without payment of customs duties., in view of the composition of INicaraguan imports and the structure of domestic commerce, there can be little doubt that practically all import charges were ultimately passed on to consumers. Taxes which cannot be clearly allocated either to business or to con- sumers consist mainly of the proceeds from the sale of fiscal stamps and stamp paper. Part of this revenue represents taxes on the gross receipts of wholesale and retail stores, on their payrolls and on gross receipts of movie theatres and of other entertainment.. By 1950/1, the revenue raised through such mixed taxes had declined to less than 5 per cent of total tax revenue. Business taxes are very insignificant, averaging half of one per cent of total tax revenue. The property and the property transfer and inheritance taxes are the only direct taxine7in caragua, They have yielded an almost identical sum during the last five fiscal years from 1945/46 to 1950/1 covered, in spite of the sharp increase in the price level during this period. Neither rising prices nor increased volume of foreign trade, nor the rise in the tax rate and the removal of the tax exemption on owner-occupied vellings seems to have had any effect on the yield of the property tax prior to 1949/50. The increase in yield in the two last fiscal years was modest, with the result that the relative contribution of all property taxes to total tax revenue declined from 5.9 per cent in 1944/45 to 3.4 per cent in 1950/51, Export taxes, which come closest to being an indirect tax on income, at least on producers of export crops, increased through 1948/9 less than other tax revenues. The yield of export taxes was first increased moderately in 1949/50 by the imposition of a general export tax and of a coffee tax in 1950/51. As a result, the share of export taxes was raised in 1950/51 to 15.5 per cent of total tax revenues. The export tax on gold did not yield more than half a million cordobas until 1950/ 1; in the same year, the lumber export tax rose to 280,000 cordobas after having yielded less than 50,000 in each of the preceding years. Various export duties levied by the Customs Administration increased gradually, with the value of exports, from 0.6 million cordobas in 1944/45 to 1.7 million in 1950/51. Miscellaneous taxes, including some which have been abolished in the meantime, yielded only about half of one per cent of total tax revenue. Government revenue other than taxes, mainly profits of government-awned enterprises, is extremely small, averaging prior to the last fiscal year, a little over C0600,000 cordobas, or not much more than one per cent of total not revenue. Reimbursements and payments for services sold and Zoods rcsol' by the government are not available for meeting ordinary government expenditures, except to the extent that resales involve a profit, and havc bean, therefore, excluded from the above analysis of the fiscal structure. b) The hiain Weaknesses of the Fiscal System 1. The present tax system is inequitable because, in spite of the profusion of taxes, large segments of the population and of the business community are, in effect, totally exempt from all taxation. Since there is no general income tax, income from the rental of real estate or farm land is not taxed at all. The large agricultural producers and the cattlemen, who hold a large part of the wealth of the country and receive a large share of the national income, pay only the nominal property tax.. Professional people are also subject only to such taxes as might apply to them as owners of real estate or other property. Merchants are subject to a 2 per 1000 tax on their gross sales (with the exception of certain a types of goods) and on their payrolls. Although the law exempts on,y the small merchants (with annual sales of less than C%5,000 cordobas or $70I'), many merchants above the exemption limit evade payment of this tax and others underdeclare their gross sales volume. The present tax system is made even more inequitable by the fact that, while consumption taxes are collected at the source (on the import or prDduction level), large groups of taxpayers evade payment of all or most direct property and property transfer taxes. It is the consensus of opinion that real property is coinonly assessed at as little as one-fifth and even one-tenth o. its real -value (even after the upward revision of original annual declarations by local Assessment Boards and the 1/ In this reprt; the conversion rate of 7 cordobas tQ .1.00 has been used through- out, -6- Revenue Administration. As a result, the total value of property declared to the tax administration is substantially smaller than the estimated national income, although it should normally be five or more times as large,y Two figures will suffice to illustrate the extent to which the property tax - the only direct tax of any consequence - is evaded: 1. During the current fiscal year, only 5)200 citizens (population: 1,200,000) are assessedlor owner - occupied homes valued at C3,000 (0450) or more.,. They pay on the average an annual tax of 17 cordobas ($2.38). 2. The total number of persons and business firms in the country paying property taxes is less than 13,500. Under prevailing circumstances, it is scarcely surprisina that the illy recent attempt to collect a nominal head tax (labeled "Impuesto proletario") resulted,in failure. 2, The entire tax system is the result of a continued increase of new taxes placed on top of existing taxes. As the revenue needs of the government have increased, new taxes or surtaxes have been added, frequently on prDducts already taxed. Apparently this has been done because the machinery for collection was already in existence. As a result of this process, the same object or transaction is frequently taxed several times through various taxes and surtaxes. Taxes on movie theaters and other entertainment are a good example of multiple taxes on the same taxable income. They are collected by the same admin- istration, but in different ways: 1. A 5 per cent tax on gross receipts (Ley de Papel Sellado 7 Timbre) 2.. A tax for the school milk fund (Fondo Pro-Desayuno) (three different rates, according to the price of tickets; Ley del 11-8-h4); and 3. A tax for municipal improvements (two rates only, but different price brackets; see Gaceta, Oct. 16, 1951). The first tax is collected by affixing fiscal stamps on a declaration of gross receipts, while the remaining two are collected in cash. In addition, three different municipal taxes on admissions are payable in anagua. It is obvious that such fiscal practices involve considerab1e incon- . venience to the taxpayer and paper work for the tax administration,./ an unduly complicated tax system is the result. The official list of taxes collected by the 1/ An average (not new) adobe house in -anagua sels for about 30 - 50,COO cordobas. 2/ Another example is taxation of gasoline. There are now in effect eight different taxes on gasoline, in addition to import duties, consular fees and .wo municipal taxes (in Mhnagua). - 7 - Revenue Administration specifies more than 150 different taxes, fees and fines, while the list of transactions and documents subject to the stamp tax includes 237 items, some of which involve 11 different rates,. The yield of these taxes - partly because of wholesale evasion is in many instances so small that the cost of collection undoubtedly is either a very large proportion of the gross yield or even exceeds it. The inconvenience and loss of time to the taxpayer who pays several different taxes on the same transaction is obvious* 3. The present tax system is highly inelastic since import taxes, the main source of government revenue yield increased returns only in proportion to the increase in quantities imported. Similarly, the yield of excise taxes, the second largest single source of revenue, has proved over the years to be extremely in- elastic. The burden of the excise and import taxes borne by consumers is such that no significant increase from this source is possible without further depressing the already low standard of living of the great bulk of the rural and urban pop- ulation. The doubling of tax revenue within the short period of five years has practicallyexhausted possiblities for increasing government revenue significantly by relying on the existing types and methods of taxation. Even alloving for the increase in the price level, the sharp ihcrease in revenue over the las- five years was possible only because of a succession of good crops and other favorable circum- stances. This rise resulted partly from the automatic increase of revenues depend- ing on the volume of foreign trade, and partly from an increase in rates-of existing taxes and duties (partly in the form of surtaxes, partly of additional taxes on top of existing taxes.). Income taxes on selected industries (coffee and cotton) now being imposed are stop-gap measures which have become necessary mainly because old tax sources were unable to yield additional revenue to launch the Instituto de Fomento, There are, here and there, certain limited areas which can be tapped by new taxes, but, by and large, any new taxes on consumption or on business trans- actions would only add to the existing list of low-yielding taxes without in any Wway solving the long-range problem of increasing government revenue for financing a program of economic development. If the same process is followed in the future, the Government will again turn to the same sources of taxation which in the past have proved to be productive and relatively easy to administer. Coffee growersi movie theaters, gasoline and goods entering foreign trade in general,are likely to be singled out and made subject to surtaxes on existing taxes, or to additional taxes. 4. The present tax system is at the point where it has become an obstacle to the economic development of the country. The regressive effect of a -system con- sistin- nearly exclusively of indirect taxes, most of which fall directly on con- sumption, depresses the standard of living of the great bulk of people - which in Nicaragua is nearly identical with farm workers and subsistance farmers, without enabling the country to improve its productive apparatus as a basis for rising living standards. - 8- The absence of direct income taxes (without mentioning any other form of progressive taxation) has not resulted in channelling the bulk of the large savings of the higher income groups into productive investment. As a matter of fact, licaragua is a striking illustration for the view that even substantial immunity from taxation of income does not automatically create favorable conditions for physical capital formation. Even more, it is important that positive fiscal action be taken to prevent a large part of profits from being channeled into unproductive investment. $. Because of laxity in enforcing existing laws and because the moral standards of taxpayers are low, most of the existing taxes yield only a fraction of what they should yield. Under-assessment, evasion and fraud are generally ad- mitted, Under such circumstances, any attempt to increase government revenues significantly merely by finding new objects of taxation or by increasing tax rates will be largely doomed to failure. Significant additional sources of revenue can be made available to the Treasury only by introducing taxes which will fall upon groups of the population so far largely immune to taxation. First among such taxes is a general income tax, the foundation stone of all modern tax systems. c) The Main Objectives of Fiscal Reforms In making recommendations for a reform of the Nicaraguan tax system, we propose the following major objectives: 1. The budget of a country determined to develop its national wealth and to raise its standard of living must be, to a larg eitent, a development budget. Up to the present time, development expenditures have absorbed at best not more than 15 per cent of net Government expenditures. 2. Any further mobilization of domestic financial resources for economic development requires thorough reorganization of the tax system and establishment of taxes the yield of which will increase automaticalIy Viith the economic growth of Nicaragua. As both the development program and the fiscal capacity of the country are likely to grow gradually, it will be essential to endow the new fis.al system with enough flexibility to yield high revenues in years of favorable crops and world prices and in other years - minimum revenues that will still permLt carrying forward the long-range program. Before passing to the recommendations themselves, we want to state our deep conviction that the problem to be faced by the Nicaraguan Government is not only a technical, but a moral one. This conclusion was arrived at not only through the careful examination f legislation, administrative and accounting procedures and of fiscal results, but after numerous conversations with government officials, tax administrators and business men. Tax receipts will continue to be reduced by fraud and evasion as long as taxpayers are not convinced that tax assessment is equitable and the tax administration honest and efficient. The taxpayer has to be convinced that all taxes due are actually paid, and that taxes paid are applied for the purposes for which they are levied. - 9 - We do not dwell upon the deficiencies of the present situation not because they are not beyond doubt - the widespread fraud, evasion and graft are freely discussed in the country --- but because we are aware of the willingness of the government to make a new departure, Formal reforms in the guise of new tax laws, new regulations, new bureaus are needed, but these cannot become effective until a determined - we are tempted to say, a heroic - effort is mada to root out not only graft and favoritism, but also apathy and negligence. The :ioral standards of the taxpayer cannot be higher than that of the tax administration, In a situation such as the one the Lission has found in Nicaragua, only drastic measures can be crowned with even a moderate measure of success, - 10 B. SUIITARY OF RECOGII.MTENDATIONS a) The Revenue System: The recommended reforms of the revenue system fall in three groups: 1. He recommend introduction of new taxes on net income. 2. !e recommend increase in rates and improvement in collec- tion of the property tax. 3. _'e also recommend a review of all other types of internal revenue and of the customs tariff, with the triple ob- jective of reducing the burden of indirect taxes, of abolishing taxes whose collection costs are dispropoztion- ally high and of simplifying the tax system by consolidat- ing different taxes (and duties) on the same object. Since the third group of recom,mencations deals with numerous specific measures, including some involving relatively small taxes, it requires consider- able more space than the first two.. -hile we believe that the adoption of the third recommendation and its prompt emplementation .,ill contribute materially to increasing the efficiency of the fiscal system and to decreasing the inconvenience to the taxpayer, the first two recommendations represent the heart of the proposed changes in the fiscal system of Nicaragua. It is recommended that the fiscal system of Nicaragua be reccnstructed on the following lines: 1. A general tax on individual and corporate net income should be introduced. This will tap fiscal resources which so far have been completely neg- lected. it will make all income receivers pay their fair share in the cost of administering, developing and, when necessary, defending the country. Income tax rates should be progressive; they should be set high enough to yield a substantial revenue, but not so high as to encouarage fraud. 2. The property tax should be rigorously enforced. It shouliz in the future, be one of the major sources of revenue of the Government, At tne present time this tax is yielding only a small fraction of its potential revenue. The present rates should be revised upward and assessments should be raised to realistic levels. The property transfer and inheritance tax should be modified to include features of a capital gains tax.. One of the main purposes of the capital gains provisions should be both to discourage and to tax speculation in real estate. 3. Export taxes should be, as far as possible, integrated with the in- come tax. Separate' taxes on a few main exoort -roducts should be naintained, at least until an effective income tax sy6tem isestabiished. Their rates should be reviewed each crop year in relation to average production costs and export prices. The rate structure should be such as to capture for the Treasury part of any wind- fall profits arising from increases in world prices and from particularly abundant domestic crops, not offset by increases in costs of production.i 4. Import taxes (including the various surtaxes as well as the tax on the weiLght of ports bultos) should be, as far as administratively possible, amalgamated with import duties. 5, 1e recommend a thorough review.of the tariff with the following main objectives: a) To establish new classifications for materials and products not listed in the tariff which has not been subjected to any general- revision since 1918. b) To integrate import taxes and surtaxes with customs duties. c) To reduce duties on consumption and on those capital goods which are not already duty free. d) To determine to what extent imports of staple foods and gaso- line to the Atlantic Coast area (Department of Zelaya) can be given the benefit of rebat6s or-even exemptions to com- pensate for the transport disadvantages of that area. The task of reviewing the tariff is so large that k,e were not in a position to make even a cursory survey. This revie:! should be undertaken as promptly as possible, as its completion will ta'e considerable time. It will re- quire the services of an experienced technician.. 6. The relative contribution of consumption taxes to the budget should be decreased. The sugar tax should be repealed immediately and other possible re- ductiohs in excise taxes, in particular those falling upon the lowest income groups, should be examined. The slaughter tax,,the tax on soft drinks and on matches should be considered for reduction in the first place. In order to reduce collec- tion costs, it might be better to repeal completely several excise taxes rather than merely to reduce all of them by the equivalent amount.- 7. The number of transactions subject to fiscal stamp duties should be reduced drastically. As far as possible,-these taxes should be merged with other taxes on the same object. 8. The tax system of a country is greatly impaired when taxes which are on the books are not actually collected. Taxes which prove ill-conceived or un- collectible for some valid reason should be repealed or promptly amended. Taxes with small and declining yield should be consolidated with other taxes or repealed, Only those taxes for which the costs of colle6to bear a reasonable ratio to average yield, should remain on the books. Collection of taxes due shouLd be rig- orously enforced. 9, Npn-tax government revenue should be increased by the sale of govern- ment lands in areas where construction of roads and other improvements increase land values. Income from the lease of government lands and from explciting govern- ment forests should also be increased. 10. The communications services should be reorganized as an autonomous agency and operated along the lines.of a business enterprise. It should be placed outside the general budget and collect its revenues directly. Its ratq structure should be reviewed in order to make it sf-suppotingf onsideration should be given to liquidating other business activities of the Government, including the match monopoly.. These recommendations are treated at greater length in section 4. ,Various alternatives as well as possible difficulties likely to be encountered in intro- ducing the reforms are also noted. b) The Revenue Administration 1. The whole success of the tax reform program will hinge on the effi- ciency and impartiality of the Revenue Administration (Direccion de Ingresos). . For the period of reorganization, and in particular while tax rolls for the property tax are revised and machinery for administering the personal and business taxes are being established, the appointment of a foreign technical tax advisor, to the lnister of Finance, responsible directly to the Fr-esident is recommended. 2.. ithin the Internal Revenue Administration, .a separate division should be created to handle assessment and collection of the property tax. Another new division should be created to deal with the new personal and corporate income taxes, It will probably be expedient to organize the work of the local Revenue offices (Administrador de Rentas) along similar lines 3. The need for a Revenue office in each department (and the present number of fiscal agEncies) should be examined. Possibly, a greater concentration of personnel would result in more efficiency by increasing functional division of work. 4. The administration of the property tax should be reorganized by: a) Requiring filing of returns with the Revenue office wfthin whose territory the property is located.. This will permit checking and auditing byMfficials.ih a position to make visual inspec- tion, and who can have access to local property and other records. b) Consolidating returns at the main office.. c) Giving local Revenue Offices the power to assess property not declared by the taxpayer,,and not just to review assessment of the property listed on returns (manifiestos)., d) Enacting provisions for tax foreclosure of property on which payment of taxes is in arrears (for a period to be determined), 5. The Customs Administration should be placed under the Mi4istry of Finance. 6. The sale of fiscal stamps should be transferred to post offices and discounts should be discontinued. This will result in economies to the government and in greater convenience to the taxpayer. 7. All taxes should be collected exclusively by employees of the Minis- try of Finance and use of free-lance collectors compensated by a percentage of revenues collected should be discontinued. 8. The practice of negotiating lump payments in lieu of taxes should be discontinued. Such practices are an indirect recognition of the fact that the * existing system of multiple taxation f the same object is irrational and cannot be administered economically. Rather than circumventing it indirectly by making separate settlements with individual taxpayers, offering additional opportunities for possible fraud, taxes for which such settlements are now permissible should be reviewed and recast to make their collection practicable, Negotiating lump sum settlement with individual taxpayers (except where necessary to avoid protracted litigation) destroys the principle of equal tax treatment of all citizens. 9. Efficient methods should be devised to audit regularly - not only when shortages or fraud is suspected - and frequently the local internal Revenue and Customs offices. 10. The possibility of using modern mechanical equipment for billing and posting should be studied. In reorganizing the revenue administration the pos- sibility of central.billing (from one single office) for all income and property taxes should be studied. 2. Government Expenditures and Sources of Revenues a. Government Expenditures Nicaragua's most pressing fiscal problem is the need for increasing government revenue. No comprehensive program for developing the resources of the country and for improving the health, education and welfare of its people can be erected on the narrow basis of a government bu( get which amounts to less than 10 per cent of national income. The development expenditures ,iti,in the budet absorb only about two percent of national income. These are small fi,ures, particularly since in Nicaragua there are no administrative units endowed with separate budgets (such as provinces or departments between th- national government and municipalities. While there are some autonomous bodies performing certain welfare functions which are not entirely financed by assigned or shared taxes (rent as pignoradas), for all practical purposes the national budget represents the total amount of revenue - lbh - available for the general administration and the economic development of the country, except for municipal revenues which are very modest by.all standards.P1 In 1950/91, 6.7.per cent of net budgetary expenditures were required to service and amortize the public debt. The cost of collecting revenue (including customs duties) and other expenditures of the Unistry of Finance absorbed an additional 16.3 per cent., The legislative, judicial and executive branches of the government including general administration, accounted for 13.8 per cent and the Defense Department for an additional 15.6 per cent. This left (after allowance for foreign relations and the communications service) 14.9 per cent for education and public health and 21.0 per cent for all economic and development activities ( (public works, economy,,agriculture, and labor).. The share of all these activities was in 1950/1 substantially the same as five years earlier (see table 1). 0 I/ Thus, the revenue of the municipality of Managua is less than two million cordobas a year, compared with 4.6 'million cordobas for San Jose, 6.7 for San Salvador, 8.1 for Panama and 10.3 for Guatemala City.. 2/ The Ministry of Economy, organized in 1948/49, had in 1950/1 a modest budget of less than 1.1 million cordobas (1.4 per cent of total net expenditures). -15 - TABLE 1 Percentage Distribution of Net Government Exnenditures Fiscal Years. 19-L6 to 1950-51 1/ 1945-L6 1946.47 1947-48 19L8h-l. 19 5 1 1. Legislative 2.5 2.5 1.9 2.2 2.5 2.2 2. Judicial 2.9 2.9 3.0 2.5 2.8 2.6 3. Presidency 3.5 -4.4 2.2 1.5 1.8 3.0 4. Interior .6.9 7.9 8,0 6.8 6.7 6.0 5. Foreign Relations 3.9 4.4 4.2 4.9 5.0 5.5 6, Defense 15.0 14.0 16.9 17.0 18,4 15.6 7. Education 10.9 12.6 11.8 11.1 10.4 10.7 8. .Public Health 2.4 2.3 3.4 3.4 2.2 4.2 9. Agriculture & Labor 2.7 2.3 2.1 2.0 2.3 2.6 10. Economy - - 0.1 2.3 - 1.4 11. Public Works g/ 19.8 14.9 13.7 16.1 11.0 17.0 12. Communications .l 5.5 5.8 5.2 5.0 6.7 6.1 13. Finance 10,6 17.5 17.6 19.6 17.0 13.1 14. Customs Administration 3.4 4.0 4.6 4.5 3.4 3.2 15. Not allocated 6.5 0.4 0.1 0.1 0.4 - 16. Public Debt 04/ __ _ 3.2 6.9 6.7 17. Total 100.0 100.0 lCO.0 100.0 100.0 100.0 1/ Based on closed accounts (liquidation), the following adjustments have been made: a. Receipts of the Customs Administration are netted out. b. Purchase of matches is eliminated from Finance, c, Refunds from the U.S. Government are excluded from Public Works. d. Finance is split between Finance and Public Debt. e. Communications are separated from Public Works prior to 1949-50; Radio National is included with Communioations. 2I Public Works slightly overstated and Communications understated becatse hold- over anpropriations could not be broken down and are allocated entirely to Public Works. / Servicio General de Administracion, 4/ Includes payments to Banco Hlpotecario to amortize the Bank of America Loan. 16 TABLE 2 Net Government Exrendituies, by Fisa.Years,.19456 to 1950-51 (in thousands of cordobas) 1950-5 as a per cer of 12454 14L-47 12L7-4~ 192= -1949-50 1 946-z' 1. Legislative 1,290 1328 1,146 1,530 1,547 1,656 124.7 2, Judicial 1,524 1,589 1,805 1,773 1,733 1,886 118., 3. Presidency 1,811 2,346 1,301 1,079 1,101 2,236 95.1 4. Interior 3i557 4,275 4,813 4,839 4,142 4,398 102.C 5. Foreign Relations 2,025 2,393 2,521 3,467 3,072 4,096 171.2 6. Defense 7,767 7,564 10,244 11,989 11,394 11,548 152.7 o 7. Education 5,662 6,819 7,122 7,880 6,406 7,875 115.5 8. Public Health 1,220 1,222 2,081 2,398 1,352 3,129 256.1 9. Agriculture & Labor 1,382 1,250 1,263 1,417 1,415 1,913 153.0 10. Economy - - - 70 1,425 1,053 - 11. Public Works 10,227 8,052 8,301 11,392 6,755 12,582 156.3 12. Cormunications 2t-847 l,122 3t157 3,520 4,134 4,510 144.5 13. Finance 5,505 9,413 10,609 13,830 10,409 9,688 102.9 14. Customs Administretion 1,.769 2.161 2,789 3,151 2,067 2,349 108,7 15. Not allocated/ 3,377 219 90 90 236 16.- Public Debt 4/263 4.222 4.931 228 17.. Total 51,712 53,910 60,442 70,688 61,40 73,850 137.0 18. Total as shown in closed accounts 59,850 68,643 71,181 82,892 64,016 76,514 111.5 1J Based on closed accounts; the following adjustments have been made; a. The Customs service is entered net. b. Purchase of matches is eliminated from Finance, c. Refunds from the U, S. Government are excluded from Public Works., d. Finance is split between Finance and Public Debt. e Communications are separated from Public Works prior to 1949-50; Radio Nacional is included with Communications. 2/ Public Works slightly over-stated and Communications under-stated because hold.-over appropriations (remanentes) could not be broken down and are allocated entirely to Public Works., 2/ Servicio general de Administracion, 4/ Includes payments to Banco apotecario to amortite the Bank of America loan. - 17 - Our analysis is based on adjusted rather than on the original figures of the closed accounts. Budget exoenditures as shown in the closed accounts (liquidacion) are inflated by inclusion of refunds and reimbursements which do not represent the actual cost of services rendered by the government. For in- stance, for some reason, until recently the theoretical amounts of duties not actually collected on exempt imports (of foreign concessionnaires; see below r. 22 footnote 1), were included in customs receipts and the corresponding amounts were shown under expenditures as "refunds". Similarly, deposits required of importers or exporters were included in customs receipts; to the extent that they exceeded duties and taxes actually paid, they apmeared under expenditures as "re imbur sements". Expenditures include also the amount of dividends to be returned to the government-owned railroad. Since these are not actually naid over, the whole transaction - which inflates both sides of the budgetary accounts - is nothing more than an accounting fiction. Finally, expenditures include amounts spent on the purchase of matches resold by the government monopoly and also funds spent by the U. S. government on the construction of the Pan-American Highway (reim- bursements by the U. S, Public Roads Administration being shown under receipts). gross OInce these various/itens are eliminated, the actual expenditure budget of the national government is considerably reduced, as can be readily seen by comparing the two last lines in table 2. During the last five years, gross ex- penditures averaged 72.6 million cor6obas, while net government expenditures averaged only 64.1 million, or 12% less. The following brief analysis of the structure of the Nicaraguan budget is based on net figures, after adjustment of the several gross items mentioned above. The various categories were re- grnuped .n order to make possible a consistent comparison over the six year period.4- Corresponding adjustments were made on the revenue side of the budget (see np.25-7). The following deductions were made from the figures of the closed accounts; 1. Reimbursements and refunds by the Customs Administration. 2. Imputed payments to the railrcad. 3. The cost of matches ourchased by the Ministry of Finance for resale. 4. Refunds from the U.S. government for road construction. Further adjustments for the communications service and for some other minor gross items (such as medicines and other products imnorted by the government for resale) were not made in order to reduce the amount of computing work involved. The original figures of the closed accounts are given in the last line of table 2. The original liquidacicn date were reprranged in the attached tables as follows: 1. The public debt service was segregated from the budget of the Ministry of Finance; payments to the Banco Hipotecario to meet the service on the Bank of America oan were classified as public debt service; 2. The communication services (rostes, telegraph, and telephone) were separated from Public Jorks in which they were included prior to 1949/50; Radio Nacional (a government-operated domestic ratio com, munications network) has been included with public service throughout. For 1945/46 the expenditure of 3,377,000 cordobes (supplemental budget) could not be allocated by departments; for this reason, increases for in- dividual departments were related to l946/47 rather than to the first year shown in the table. - 18 - Net government expenditures have increased since the end of the war by more than one third. This increase was considerably higher than shown in the gross figures of closed accounts (37 against 11.5 Der cent.) From 1946/47 to 1950/51 expenses increased about 10% for the legislative and judicial branches, the pres- idency and the general administration (which together now account for about one- seventh of total expenditures).. The greatest increase was for the Public Health Department which in the last year has greatly expanded its activities, partly in cooperation with international programs. Foreign Relations ranked next (except for the public debt service), reflecting not only the rather costly participation in United Nations and related activities and international conferences, but costs of a rather widespread and abundantly staffed diplomatic representation, The increase in expenditures of the Defense Department - over fifty per cent - was among the largest. Actually, the amounts shown under Defense Department do not include all military expenditures. Some military units (such as the urban police of Managua and the finance guard (Resguardos de Hacienda) are carried on the budgets of the Interior (Gobernacion) and the Finance Department, although their functions are apparently not much different from those of units stationed in other cities and nerforming "gendermeiie"functions. Other military expenditures (such as for1D'eartamento"de Defensa Nacional") are carried in the Presidency budget 'Presidencia y Comandancia General). 1 If the two units carried in the Interior and Finance Ministeries were shifted to the military budget, it would increase by nearly one-thir3. Actual military expenditures amounted in 1950/51 to at least 20 rather than to 15.6 per cent of total expenditures. If expenditures included all members of the Guardia Necional, the military budget would be even higher because there are smaller units of Guaridh Nacional, or even individual guardsmen attached to other administra- tions as guards, chauffeurs, etc. In contrast, the budget of the Ministry of Education - in a country where 80 per cent of the population are illiterate and where the efficiency of the entire public administration sufers from lack of trained personnel - increased percentage- wise less than the budget as a whole. The increase in public works was much larger than for the net budget as a whole, but the increase of 56.3 per cent shown in table 2 overstates the actual rise since a considerably larger proportion of the Nicaraguan road building orogram was financed by the U.S, Government in 1946/47 then in 1950/51. Total expenditures of the Public Works Department (including the share of the U.S. Government) increased only 6.2 per cent. The budget of the Yinistry of Agriculture and Labor increased also 53 per cent. The budget of the Finance Ministry represents the largest single departmental expense; in our tables, we have broken down the burget of the Finance Ministry between administrative and public debt expenditures;as can be seen from table 2, the latter have increased considerably more than the former. In table 1, net government expenditures are shown annually for the six fiscal periods since the end of World War II. In table 2 the percentage distri- bution of government expenditures is shown for the same period. I/ There is more justification for including Radio Neeional with the Communica- tions Service than in military expenditures (as has been done in recent budsPets) although its personnel forms.part of the National Guard, as does - nominally - that of the Customs Administration. -19- b. The ouied 60 00sernment Revenue The Ministry of Finance has not nublished an Annual Report since 1944/ 5, but we understand that reports for subsequent years are under preparation. In the meantime, in preparing this report, we had to draw upon such data as were available at the Accounting Office (Tribunal de Cuentas) and on information supplied by various officials of the Ministry of Finance. In order to analyze the sourees of national revenue and the nature of the changes which have taken place in recent years, it is necessary to regroup (and in some cases, to break down) various categories of receipts summarized by the Accounting Office in its annual "liquidaciones". The detail of the adjust- ments made is given in the technical note appended (p.25-27).The fcllowing analyis covers the six fiscal years since the end of the war (1945/46 to 1950/ Net government revenue of Nicaragua more than doubled (increasing from 41.0 million to 84,1 million cordobes) between 1945/46 and 1950/51. This i-crease Is considerably sharper than that shown in the original liquidacionas (compare lines 3 and 7 in table 4). This result was achieved largely (and prior to the last fiscal year, nearly exclusively) by increasing the b2ready heavy burden borne by consumers. Net tax revenues increased in each year, but only by small amounts in two of the years (194?/48, when the coffee crop was poor and 1949/50, when it was disastrous). Increases in government revenue resulted in each case from large in- creases in the yield of excise and import taxes. Thus, in 1946/47 import taxes alone increased by the same mount (9 million cordobas) as total taxes. In 1948/49 when tax revenue rose by nearly 8 million, import and excise taxes accounted for the entire increase. Even in 1950/51 when export taxes increased'almost four times compared vith the preceding year, import taxes rose nearly as much as ex- port taxes. Altogether, of a total increase of net tax revenue of 43.1 million cordobas between 1945/46 and 1950/51, 28.3 million were obtained from higher excise and import taxes, The most striking features of the Nicara'uan fiscal system aret 1. The heavy reliance on indirect taxes and duties falling es- sentially on consumption# 2. The insignificance of direct property taxes. 3. The absence of a personal or business inccme tax.. 4. The insignificance of business taxes. 5. The absence of any nro,ressive features. Indeed, as can be seen Prom table 3, in each year orior to 1950/51 im- port and excise taxes combined (lines 5 and 6) Smounted to:more than85oor more per cant;fjotanetrronuse-.Only after the imposition of the general 5 per cent export tax and of the coffee.tax of exp6rt 3.00 per 100 pds did this percentage decline to 76 per cent. 1/ Because of the purpose of this study, it was deemed unnecessary to go further back, A more historical approach would require considerable research and a large volume of statistical computations to assure comparability. - 20 - TABLE 3 GOVERNMENT NtT TAX REVENUE FISCAL YEARS 1945/46 - 19l (1) (in thousands of cordobas and per cent of total tax revenue) 1945/46 1946/7 1947/48 1948/49 1949,50 1950/51 1. Property Taxes 2,026 5.0 1,946 4.0 2,005 3.8 1,988 3.3 2,368 3.9 2,776 3.4 2. Export Taxes 1,428 3.5 1,539 3.1 1,863 3.6 1,313 -2.2 3,233 5.4 12,878 15.5 3. Business Taxes 256 .6 254 .5 278 .5 2.86 .5 303 .5 328 .4 4. Mixed (business and consumption) Taxes 1,993 4.9 Z,219 4.5 2,397 4.6 2,499 4.3 20782 4.7 3,749 4.5 5. Import Taxes (2) 19,836 49.1 29,261 59.4 27,869 53.7 33,678 56.5 29,619 49.5 39,021 47,. 6. Excise Taxes (3) 14,618 36.2 13,811 28.1 17,210 33.1 19,522 32.7 21,281 35.6 23,691 28.6 7. Miscellaneous Taxes and Fees 251 0.6 187 _0.4 321 0.6 362 0.6 238 0.4 381 0.4 8. Total Net Tax Revenue 40,408 100.0 49,217 100.0 51,943 100.0 59,647 100.0 59,824 100.0 82,824 100.0 (1) Including taxes transferred to autonomous funds (Rentas Pignoradas). Because of rounding, some totals do not add up. (2) Including additional contributions of the Customs Administration. (3) Including the estimated fiscal revenue of the match monopoly. 1 21 - TABLE 4 GROSS GOVURNMENT REVENUE FISCAL YEARS 1945/,46 to 195o/51 (1) (In thousands cordobas and per cent of total gross revenme) Type of Revenue 1945/46 . 1946/47 1947/48 1948/49 1949/50 1950/51 1. Total Net Tax Revenue (2) 40,408 90.0 49,217 84.2 51.943 90.0 59,647 90.8 59,824 93.9 82,824 92.9 2. Profits of Government owned enterprises 608 1.4 620 1.1 836 1.4 539 .8 545 .9 1,320 1.5 3. Total Net Revenue 41,016 91.4 49,837 85.3 52,779 91.4 60,186 91.6 60,369 94.8 84,144 94.4 4. Miscellaneous Sales (in- cluding matches' (3)) 3,429 7.6 3,391 5.8 3,174 5.5 2,691 4.1 3,077 4.8 3,-897 4.3 5. Reimbursements 462 1.0 5,201 8.9 1,768 3.1 2,827 4.3 253 .4 1,039 1.2 6. Total Gross Government Revenue 44,90? loo. 58,429 100.0 57,721 100.0 65,704 ioo.o 63,699 10O.O 89,080 lGo.o 7. Government Revenue According to Liquidacion (4) 53,025 68,o24 66,391 74,926 65,377 90,046 8. Difference Between Lines 7 and 6 8,118 9,595 8j670 9,222 1,678 966 (1) Including taxes transferred to autonomous funds (Rentas Pignoradas). Because of rounding, some totals do not add up. (2) For detail, see Table 3. (3) Estimated at 2/3 of tJhe receipts from the sale of matches. (4) Includes, in addition to the line above, the imputed receipts of dividends from the government-owned railroad and amounts to be refunded by the Customs Administration. - 22 - Excise taxes on alcoholic beverages and tobacco are the main sources of revenue from ultimate consumers. The share of these two sources of revenue has declined from 86 per cent of all excise taxes in 1945/46 to 77 per cent in 1P50/51-because of the introOuction of new excise taxes (on soft drinks and admissions), even though tax rates on alcoholic beverages and on tobacco have been increased in 1950/51. Previous to the last fiscal year, the tax on alco- holic beverages alone has provided more than half of the yield of a-l excise taxes combined. As a matter of fact, during the first fiscal year of the period covered, more than one-fifth of net government revenue was derived from liquor taxes. Other important excise taxes were those on sugar, soft dr-nks, cattle slaughter, gasoline, and matches -- all of which fall on the broad masses of con- sumers. The three separate taxes levied on admission tickets to movie theaters and other entertainment were paid largely by resients of the larger cities. While excise taxes nroner accounted for only about one-third of total tax revenue, there is no doubt that practically the entire burden of import duties and imort taxes, which in recent years accounted for half or more of tax revenue, was borne by consumers. In the first place, a significant segment of business (foreign concessions) is exempt from import duties (and some related taxes as well). Thus, between 12 and 19 p,r cent of dutiable merchandise entering the country was imported by concessionnaires without payment of customs duties.41 In view of the composition of Nicaraguan imnorts and the structure of domestic commerce, there can be little doubt that practtcally all duties and taxes on im- ports were ultImately passed on to consumers#Z 1/ The statistical record of the last tenty years su7gests that foreign conces- sions may have taken undue advantage of the custom exemption privilege, im- porting without paying customs (uties larger quantities than can be justified as representing materials for their own use and for consumption by their employees. Imports into Nicarague consist of three categories of goods, those enter- ing duty free, those which are subject to the duties and finally those which are exempt from payment of duties. This third category includes goods imported by the government-owned railroads, public utilities and by foreign concessions. Many foreign concessions have been able to obtain by long-term contricts the right to import exempt from duties all goods needed for the conduct of their business. This includes in some cases, not only machinery equipment, fuel and raw materials, but also miscelleneous articles. The 28o,1!o' exempt imo- ports is not reported by the Customs Administration but the amouzt of the exemptions is. The amount of duty concessions granted to concessions and other foreign firms can thus be related to the amount of duties actually paid. It is likely that the ratio of the value of the two categories of imports is not much different from the ratio of duties falling on them.. The dollar value of exempt imports of mining and industrial firms alone, enjoying exemption from import duties, is estimated'for the twenties and'thirtles at notAgh more than 4 to 7 per cent of imports subject to duty. In recent years, they have run between 12 and 19 per cent.. 2/ In addition to duties (snecific and ad valorem),imports are subject to the payment of consular fees (a flat 5 per cent on FOB value), of two separate taxes on the physical volume of imports and of a 5 per cent "basfct and a 5 per cent general ad valorem import tax. In sedition,-in 1950/51, the exchange surcharges yielded 1.9 million cordobas, - 23 - Business taxes are truly insignificant. Annu-l license fees are paid by various categories of manu 'acturing and trade establishments. In addition, two groups of financial institutions are subject to special taxes: insurance companies and banks (to meet the cost of the office of the Superintendent of Banks. All business taxes combined average only half of one per cent of totalntax revenue. The largest amount of taxes falling upon business is collected in the form of stame duties. Fiscal stamps must be affixed to a large variety of documents, such as receints, bills, contracts, diplomas, etc., while certain applications, and briefs must be written on stamp Daper. Part of the revenue from fiscal stamps and paper is obtained directly from consumers, but the bulk is paid by business., In particular, two business taxes are payable in fiscal stamps. One is the tax of 2 Der 1000 on the gross value of sales and of the mount of salaries paid by all wholesalers and retailers with an annual gross volume of C'5,000 and more, The other is a 5 per cent tax on gross receipts of movie theaters and other public enter- tainment. It is likely that a large part of the total receipts from the sale of fiscal stamps represents payment of these two business taxes, and that a large part * of the balance is uaid by business firms for various legal papers, repeipts, and other documents. However, by allocating the entire rev-nue from this source to business taxes, we slightly overestimate the share of these taxes - small as it is - in the revenue system. Pronert (including the property transfer, gift and inheritance) taxes have yielded an almost identical sum during the five first fiscal years covered, in spite of the increase in the price level, The property ("capital") tax accounted in recent years for about 3/4 (or more) of the yield of property taxes. With the repeal of two small special taxes (to combat the chapulin and the tax on enemy aliens), the property and the property transfer and inheritance taxes remain the only direct taxes in the Nicaraguan tax system, The property tax rate is extremely low, 1 per 1000 for owner-occuied dwellings and qk perlCO for all other property (with an exemption of 3,000 cordobes, or about 430). These rates represent a consolidation of three separate taxes previously levied on property. The ,ield of the property tax in 1950/51 was 2,3 million cordobas, or 2.8 per cent of total tax revenue, even though in that year it was increased by a head tax of 3 cordobas which, hove-er, was not actually generally collected and was subsequently repealed. 1/ Prior to 1949/50, rising nrices, increased crops, the rise in the tax rate and the removal of the.tax exemption on owner-occuDied dwellings,,all failed to increase the yield of the property tax. Ex ort taxes (which come closest to being an indirect tax on income, at least on producers of export crops) increased through 1948/49 less then other tax revenues. The yield of export taxes was first increased moderately (by 1.1 million) in 1949/50 by the imposition of a general export tax (the yield of which increased to 5,6 million in 1950/51) and of a colTee tax in 1950/51 (which yielded 4.6 million As a result, the share of export taxes rose in 1950/51 to 15.5 per cent of total tax revenues. / it waspayable 'by every male over 21 and below 60 Estimating the population subject to this tax conservatively at 300,000,.this "Impuesto Proletaric" should have yielded nearly one million cordobas.. Probably less then one- tenth of this amount was actually collected. - 24 - The export tax on gold is 1/2 per cent of the official value of $35 per ounce, although Nicaraguan gold is sold on the free market at premium prices. Only in 1950/51 has it yielded more than half a million cordobas; in the same year the lumber exnort tax rose to 28000 cordobas, after having yielded less than 50,000 in each of the preceding years. Various exDort duties levied by the Customs Administration have increased gradually, with the value of exports, from less than one million cordobas in 1945/46 to 1.7 million in 1950/51. There are a number of small taxes which cannot be clearly allocated eithe2 to business or to consumers ("mixed taxes" in our table 3), AutomoDilp license plates were added in 1948/49. In 1950/51, the revenue raised through mixed taxes was about 4.5 per cent of total tax revenue. Uip4llaecus taxes, including some which have been abolished in the meantime, yielded also only about half of one per cent of total tax revenue. The most important item in this group are two taxes paid by municipalities (one to meet the cost of local courts and the other that of the office in charge of audit- ing municipal finances) which actually represent transfer to the national govern. ment of a small fraction of municipal tax revenues. Government revenue other than taxes is extremely small, averaging prior to the last fiscal year, a little more than O$600,000 cordobas, or not much more then one per cent of total net revenue. Such revenue consisted of dividends of the Bank of Nicaragua (which paid into the Treasury only a relatively small part of its net profits) and the orofit of the Harbor of Corinto (orerated by the government-owned Ferrocarril del Pacifico de Nicaragua), Two additional sources of revenue are included in the Nicaraguan budget and report of the Accounting Office: 1. Reimbursements for cash outlays not chargeable to the budget (table 4, line 5) and 2. Receipts of government-operated communication services (postal, telegraph, telephone, radio) and from the resale of merchandise by ,he government either to collect excise taxes as in the case of matches, or to supply medicines and various products to farmers at fair prices (line 4). In addition, in the years nrior to 1949/50, receipts included amounts to be refunded or reimbursed by the Custons Administration (included in line 7). Reimbursements and payments for services sold and goods resold by the government are not available for meeting ordinary government expenditures, ex- cept to the extent that such operations involve a profit. Our analysis is, therefore, restricted to net government revenue, to tax revenue, and to genuine non-tax revenue (profits of government owned enternrises.) 1 Total gros government revenue, including sales and reimb-irsements, (table 4, line 6), increased from 44,9.million cordobas in 1945/46 to 89.1 mil- lion in 1950/51, a considerably sharper increase than shown by the unadjusted of- ficial data in line 7 of table 4 which for the earlier years include and for recent years exclude refunds by the Customs Administration. As far as we can determine, revenue from other quasi-business activities other than the match monopoly has been negligible. The operations of the Communications Service require a considerable subsidy. - 25 - Only in 1946/47, when reimbursements from the government of the United States for the construction of the Pan-American Highway were particularly heavy, reimburserents and payments for goods and services combined amounted to as much as 14.7 per cent of total gross revenue, Reimbursements alone came to P.9 per cent; in the other years, they fluctuated irregularly between 0.4 and 4.3% of gross government revenue. Receipt of the Communication Service and miscellaneous sales (including those of matches) represented the larger source of gross revenue (between 4.1 and 7.6 per cent). While strictly speaking not a form of taxation, the foreign exchange control system in operation since the beginning of 1951 has, in effect, placed considerable additional revenue. at the disposal of the government. The average effective buying rate is now 6,60 cordobas for one U.S. dollar, while the of- ficial selling rate varies, according to the urgency of imports or other foreign expenditures, between 7 and 10 cordobas, This exchange system amcunts to an additional tax of 40 centavos per dollar of exports (assuming 7 ccrdobas to the dollar to be the true exchange parity), and to an additional taxation of part of imports at one or three cordobes per dollar of import cost. The total mount of revenue raised through exchange surcharges has been substantial. If the foregin trade situation continues favorable, and after the 1950 foreign trade debt has been liquidated, revenue from exchange surcharges will become available for development and other budgetary purposes. It should be included when analysing current government revenue.. It should also be taken into consideration that the present foreign exchange control system involves subsidizing of government imports, as 10 per cent of foreign exchange obtained from exports is made available to the govern- ment at the exchange ratp4oft:5 cordobeast. the dolartilrl Technical Note to Section 2b The figures in table 3 and 4 (lines 1 through 6) include all cash re- ceipts of the national government, including (1) assigned and shared taxes, (2) extraordinary receipts ("ingresos no previstosO - mainly reimbursements for the Pan-American Highway and transfers of reserves accumulated by the Customs Administration), and (3) municipal revenue transferred to the national govern- ment (a relatively minor item). Starting from the closed accounts (liquidaciones) of the Accounting Office, the main adjustment made involved$ 1. Netting out receipts of the Customs Administration which, prior to fiscal year 1950/51, were given in the liquidacion the gross fcrm (i.e. in- cluding reimbursements for over-payment and the theoretical amounts of Import duties on imports of foreign concessions exempt from such duties). 2. Adding to customs receipts of reserves accumulated by the Customs Administration and transferred to the general fund ("sobrantes de reservas aduaneras"). Since a breakdown of the origin of these reserves is not avail- able, and since during the period covered more than 90 per cent of net customs revenue consisted of import duties, the entire amount of these reserves was assigned to import taxes. 3. Under "Miscellaneous Revenue? (Rentas Diversas) the liquidacion of the Accounting Office lumps together a wide variety of registration, license and monthly business taxes with some minor non-tax revenue./ Also, in the earlier years, some items were included in this section which in subsequent years are shown under other headings. Most, but not all items included in "Miscellaneous Revenue" are listed in a "Cataloso Oficial de Ingresos Fiscles" compiled in 1948,2/ This catalog lists more than 150 individual items. Some of them are not taxes or fees, but rather prices charged for the sale of various government documents, and charges for the telephone, telegraph and radio service and for the sale of matches. Various police and other fines are also included. Miscellaneous taxes and fees of a revenue character may be grouped under two main headings, business taxes and miscellaneous taxes and fees: Business taxes and fees Include; 1. Business registration fees (on various categories of drugstores, importers, laboratories, soft drink plants, breweries, tobacco factories, medicine wholesalers and retail outlets and producers and seller of alcohol, aguardiente, liquor and perfume). Some of this revenue is estimated in the budget (but not shown in the liquidacion) under the heading "Impuesto sobre licencias para comercientes". 2. Monthly taxes paid by some of the establishments listed above. 3. Registration fees for patents, trademarks, registered design and patent medicines. 4, Taxes,on mining (including oil), prospecting, and on working of mining and lumber properties. 5. Tax on railroad freight. Miscellaneous taxes and fees include: 1. License fees on boats, firearms, dogs, vehicles (revenue from auto license plates is shown separately) and flashlights. 2. Miscellaneous taxes on consumption, such as taxes on entertainment and foreign medicines. 3. Miscellaneous fees and taxes which affect individuals as well as business such as taxes on sailing permits, mail delivery and notorisation of documents. 1/ The monthly "Recapitulacion"' of the Tribunal de Cuentas, while listing revenue under all principal headings, lumps together most of the individual fees and minor taxes. A copy has been brought up to date for us to include changes subsequent to September 24, 1948. The Cataloeo also lists some categories of internal revenue which are listed separately in the liquidacion (such as property transfer and slaughter taxes as well as several taxes and fees grouped there under the heading of "Sanitary fund" a Tesoro de Sanidad). --27 - , have allocated the various items included in "Rentes Diverses" (after transferring some items to other headinFs)., as follows: 1. Sales of products and services (included in table 4, line 4). 2. Business taxes (included in table 3., line 3). 3. All other miscellaneous taxes and fees (included in table 3, line 7). In recent years, all business taxes and fees combined, included in "Rentas Diverses", yielded about C^k100,000 a year. All other miscellaneous taxes and fees averaged only about half of this amount. 4, The receiots from the sale of matches was broken dowm between the cost of matches (based on the price paid by the government) and net fiscal revenue (estimated as the difference between the sales price to distributors of matches and the cost price). It was estimated that the fiscal revenue represents one-third of the gross item listed in the liquidacion under "matches". The remainder was assigned to "miscellaneous sales". 5. Several minor reclassifications were made to preserve comparability of the various categories over the entire period covered. 6. Dividends paid by the Ferrocarril del Pacifico de Nicaragu, which are an accounting fiction and do not represent actual cash receipts, were ex- cluded. The eff"ect of excluding refunds and reimbursements of the Customs Administration and railroad profits was to lower total gross government re- ceipts in the fiscal years 1945/46 to 1948/49 by between 12 and l per cent. The difference was much smaller in the two recent fiscal years (see table 4, line 8). -28- a. The Structure of the Tax System The Nicaraguan tax system is unnecessarily complicated for a small country with a population of 1.2 million. Fortunately, however, scme of its more undesirable features can be removed without reducing significant sources of revenue. For instance, while the list of transactions subject to stamp duties requires 23 pages of close print, only a few of the provisions of the Law on Stamp Paper and Duties (Ley de Papel Sellado y Timbre) are actually important. 1. Part of the complications in the existing fiscal system are the result of the independent status of the Customs Administration. In order to retain direct government control over any increase in import levies, import taxes (collectible by the Internal Revenue Administration) were introduced on some products instead of increasing import duties. With the placing of the Customs Administration under the coplete control of the Ministry of Finance this * motif will disappear and a full integration of import duties with import taxes and consular fees will become possible. 2. Another complication arises from the fact that the respecti-ve taxing powers of the national and municipal governments are not defined. Thus, real property is taxed at the same time by the national and by municipal governments. There is a clear tendency for municipal governments to impose taxes on items or transactions already taxed by the national government. For instance, movie theatres (and other entertainment) are subject in Managua not only to a 5 per cent national tax on gross revenue, but to an identical municipal tax as well. In addition to two national taxes on admission tickets (earmarked for specific purposes) there are additional municipal taxes for two welfare funds. 3, The system of assigned and shared taxes (rentas pignoradas), of special funds and of earmarked taxes creates unnecessary complications in Treasury accounting and withdraws from the control of the Minister of Finance and of Congress considerable sums of tax revenue. The number of assigned (including shared) and earmarked taxes has grown considerably in recent years. The 9iquidation for the fiscal year 1950/51 lists 15 different assigned taxes.-' Not fewer than six different assigned taxes are levied on one single product - gasoline. Five of the assigned taxes are shared between two special funds. Half of the proceeds of four of these taxes is covered into the general fund and is earmarked, in equal part, for two different purposes. Furthermore, two important non-assigned taxes (the 5 per cent export tax and the property transfer, gift and inheritance tax) are shared between the general fund and a special fund. One of them, for the victims of Cerro Negro, is no longer levied, but another earmarked tax on admissions (for civic improvements) has been imposed in the meantime. -29- There are two assigned taxes (for the school lunch fund - Fondo Pro- Desayuno Escolar . and forithe construction of the National Stadiun) which are covered directly into the general fund. In addition, one tax (the coffee export tax of $3.00 per quintal) is covered into the general fund, but is earmarked for two different purposes. The larger part of the pro- ceeds (80 per cent for the Rama Road) is segregated in a special account at the National Bank, the smaller (20 per cent for the road building program) is merged with other revenue. The special semi-postal stamp for the con- straction of the National Stadium should also be considered as an earmarked tax covered into the general fund. The imposition of special taxes to meet the cost of projects which are deemed indispensable has been a direct consequence of the meagerness of the regular government revenues in recent years. Thus, special taxes were levied on numerous consumption goods and on admissions to finance welfare work among prisoners, the construction of a hospital in Managua, and such organizations as the Tourist Office and the National Sports Commission or the Coffee Growers' Association. With the exception of the 5 per cent export tax, which in 1950/51 yielded (in addition to channelling 2.3 million into the general fund) 3.4 million cordobas assigned to increase the capital of the Mortgage Bank (Banno Hipo- tecario), the yield of the various assigned taxes was on the whole neager. Fourteen different taxes (or shares in taxes), some of which were collected by two different administrations (Revenue and Customs Administration) yielded a total of 1.2 million cordobas; the revenues from the individual taxes ranged from as little as 8,877 cordobas (Communications Week) up to 179,000 (share in the property transfer tax). The different ways in which the several assigned and shared taxes are earmarked for specific purposes or transferred to autonomous organizations may be summarized as follows: 1. Some are transferred to autonomous organizations which are under various degrees of government supervision, The budgets of these organizations (for example, the lcal Welfare Boards - Juntas de Asistencia Social) are appended to the national budget, and audited by the Accounting Office (Tri- bunal de Cuentas). The closed accounts are, however, not submitted to Congress by the Minister of Finance. 2. Some are transferred to autonomous organizations whose budgets are not even submitted to Congress (for example, the National Sports Commission - Comision Nacional de Deportes). 3. Some are assigned to special accounts segregated on the books of the National Bank from the general fund of the Treasury (Rama Road Fund), 4. Some are assigned to earmarked accounts, not segregated on the books of the National Bank, but specifically recognized in the expenditure budget (National Tourist Office; see the 1951/52 Budget, p. 229). - 30 - 5. Some receipts are earmarked in the budget for a specific purpose; there is, however, no visible relationship between the yield of such taxes and the expenditures for specific projects which they are supposed to finance. Thus, when surtaxes on liquor, tobacco and beer were introduced last year (October 26, 1950), it was specified that the proceeds were to be used to meet the expected deficit. If no deficit should occur, the receipts were to be used, in equal shares, for the construction of schools and of sanitary units. The year ended with the highest surplus in the history of the country but there is no evidence that the amounts earmarked for schools and sanitary units are being spent for the purpose designated in the law. 6. Some taxes originally imposed for a specific purpose are not (or at least not now) used for that purpose, such as the tax on insurance premiums. When the tax on insurance pre,iums was imposed in 1944, the revenue from this source was earmarked for public education. We are informed that cur- rently the proceeds of this tax are not assigned to any specific purpose.!/ Although the number of assigned and shared taxes has been growing in recent years, total revenue collected by the national government and trans- ferred to autonomous budgets amounts to not much more than 5 per cent of total net government revenue. With the formulation of a comprehensive dev- elopment program and the general increase of the fiscal resources of the government, the need for earmarking taxes for specific purposes will be removed. Since in most cases it is difficult to establish a direct relation- ship between revenue raised through earmarked taxes and expenditures for specific projects, we recommend that all earmarking of this type be discon- tinmed. In particular, earmarking of funds for welfare and similar purposes and sharing of taxes should be discontinued. The government should decide what resources are required for such purposes and make the necessary provisions either within the general budget or by transferring funds from the general government revenue to autonomous bodies, such as the Juntas de Asistencia Social. In some cases it might be desirable to assign revenue from specific taxes to the broad purposes of capital development, such as to the Instituto de Fomento or to the road building program, rather than to specific projects. In such cases at the end of each fiscal year, in connection with the liquida- cion, the actual use of these revenues should be accounted for. Amoints not spent for the assigned purpose should be deposited in a segregated reserve fund. 1I A recent example of general earmarking may be found in the new tax on admissions: "The executive will assign the full proceeds of this tax for public improvements in the cities and villages of the Republic." Decree No. 21, Art. 3 ("El producto del impuesto sera destinado integra- mente por el Poder Ejecutivo a la ejecucion de planes de mejoramiento de las ciudades y pueblos de la Republica.") La Gaceta, No. 219, October 16, 1951. - 31 - In spite of the multiplicity of low yielding taxes-and the difficulties of their administration, in spite of the existence of earmarked and shared taxes and of internal taxes superimposed on import duties, the Nicaraguan fiscal system is less complicated than that of some other Latin American countries. For instance, departments have no separate taxing power, so that there are only two layers of taxation. Moreover, collection of some local taxes (in Corinto, Bluefields, and some other ports) by the Customs Adminis- tration reduces the number of collecting agencies. Actually because of the high degree of centralization of the government structure and the relatively small number of individuals and businesses likely to be subject to the direct taxes recommended, the problem of creating an efficient tax administration in Nicaragua is one which requires Dnly time and determination. d. The Incidence of Taxation Relatively little can be said definitively about the incidence of national taxation in Nicaragua. A disproportionately large part of government revenue is raised .through indirect taxes (including import duties), but some of the basic statistics required to analyse the incidence of this type of -,axation are entirely lacking. The most important gap, perhaps, is that no breakdown of customs duties collected by class of i.ports is available. There are no typical consumption (or expenditure) budgets, no estimates of either nativ al income or of the distribution of the population by socio-economic groups.- This much, however, is clear: individuals in the upper income groups pay no income taxes and only nominal property taxes. Their standard of living is extremely frugal in the light of comparable absolute and relative income levels in other countrtes, and their consumption expenditares are low in relation to current income and accumulated wealth. Moreover, a very large proportion of consumption expenditures of individuals in the upper income brackets is not subject to excise taxes. The tax system of Nicaragua is highly regressive not only because that part of income which is saved is not taxed, but because the weight of con- sumption taxes is heaviest on the articles of current, ordinary consumption rather than on luxury goods. Luxury products are subject to relatively lower import duties than articles of mass consumption. The yield of specific taxes falling largely on the higher income groups, such as taxes on insurance premiums or automobile license plates, is insignificant. On the other hand, a large part of the consumption expenditures of the upper income groups vir- tually escapes taxation; these include food grown on farms.(including that Some of these data will become available shortly when tabulation of the Census of Population is completed. -32- for use by the servants and farm workers), -o<ner-occupied country and town homes (the wealthy farmer being frequently an absentee landlord, having a commercial or professional practice or a government job in the city), cash salaries to servants, and foreign travel. Expenditures for goods subject to .taxation from which the bulk of gov- ernment.revenue is derived, such as clothing, household goods, sugar, matches, liquor, soft drinks, and tobacco, absorb a much larger proportion of income of the lower than of the higher income groups. The peon who, in addition to food, receives a cash wage amounting to three to five cordobas (50-35 cents) a day, spends the bulk of his income on heavily taxed articles. The sugar tax alone, the bulk of which is collected from the poorer group of population, yields 15 times as much as the entire real estate taxes paid by all home owners (only 5,200 of which, it may,be recalled, are paying property taxes). Or, to make another comparison, the match monopoly yields, net, 15 times as much as real estate taxes on owner occupied homes. Fiscal revenue from matches and sugar combined was almost as large as total tax revenue from all personal and business property, real and movable. Inasmuch as a disproportionately large part of government revenue is derived from import duties and other forms of import taxation, the incidence of taxation depends to a large part on the structure of the customs tariff. While we have not had an opportunity to review the tariff in detail, we would like to cite some of the more glaring examples. Imported textiles are a4ong the most important articles of prime nec- essity, although the poorest groups of the population also buy domestic cotton goods. All rayon goods are iiiported. Of total imports other than capital goods (iron and steel products, chemicals and machinery, the latter being duty free) amounting in 1950 to 17.1 million dollars, cotton goods accounted for 3.1 million and rayon goods for an additional 1.0 million * dollars. Thus consumer expenditures for clothing and household textiles (sheets, towels, etc.) alone bear a disproportionately heavy share of total import duties and taxes. Most cotton goods are subject to specific duties which could not be analyzed in detail in the short time available, but a few examples will suffice to illustrate the heavy burden on consumers: 1. Woments, men's and children's cotton clothing is subject to a 68.75 per cent ad valorem tax (tariff Nos. 512 and 515). 2. The.duties on cotton sheets and pillow cases are 0$6.20 per net kilo (tariff No. 497), Sheets and pillow cases, moreover, are subject to the highest exchange surcharges. 3. Rayon underwear and outwear (dresses) are subject to an ad valorem duty of 150 per cent (tariff No. 624). - 33 - 4. Rayon hose (tariff No, 621a) is subject to an ad valorem duty of 112.5 per cent.17 To these duties must be added the 5 per cent consular fees on the FOB price, the 5 per cent general ad valorem import tax and a 5 per cent "basic" import tax. There are, furthermore, two taxes on the weight of imports (bultos) and various minor customs and port charges falling on all imports. Thus, in the case of textiles and textile goods all import levies combined add up to as much as twice the FOB price, In contrast, duties on gold and matches are only 20.625 per cent (tariff No. 146) and on photographic cameras 27.5 per cent ad valorem. The import duty on refrigerators, a luxury item in Nicaragua, is about 100 cordobas (less than $13) for an 8 cubic feet unit, or about 5 per cent of tha c.i.f. value. The import duty on a gr,and piano is less than $75. There is no duty on the import of automobiles. 2 The contrast between heavy import taxes on consumption goods and relatively light duties on luxury goods is striking. It might be added that most duties on articles of mass consumption are ad valorem, thus automatically increasing with the rise of the price level, while those on many luxury items are speci- fic duties, fixed in gold cordobas and converted at the rate of 5 cordobas to one gold cordoba; a realistic conversion rate would be in the neighborhood of 7 to 1. 3._The Tax Administration a. Collection of Government Revenue It is no mean task to obtain a clear picture of the Nicaraguan tax system, as tax laws are not codified, nor is there any systematic printed ocllection of administrative or court decisions in tax and customs cases. The revenue administration reflects the heavy reliance on import duties and on taxes levied on imports and exports. Nearly half of the government revenue is collected by the Customs Administration, including certain taxes The original tariff of 1918 did not list rayon. All rayon products are taxed under the tariff for silk, rayon being considered an artificial silk. When the import duty on passenger cars was removed, the gasoline tax was raised. What was supposed to be a compensating move turned out to be a hardship for the population of the east coast where rivers are tae most important means of transportation. The population of the Zelaya depart- ment, where there are hardly any private cars, did not get any relief from the removal of import duties on cars. Transportation costs (trans- portation being also an important element of cost of goods sold by itinerant merchants along the rivers) in that area jumped with t-ne cost of gasoline used on motorboats. - 34 - which are classified as internal revenue but which are collected at the point of entrance or exit. During the fiscal year 1950/51 more than 43 per cent of the cash receipts of the Nicaraguan Government, after deduction of its own administrative expenses and the service on the 1909 Ethelburga,loan, was deposited at the National Bank by the Customs Administration.-/ Since the bulk of foreign trade moves through the port of Corinto, the customs house there is o e of the most important collectors of government revenue in the country.2 Certain categories of government revenue are collected directly by the National Bank acting as fiscal agent. Such revenues include as principal items the bulk of consular fees, the export tax on coffee and the profits of government-owned enterprises. Part of this revenue is collected in foreign exchange. Contrary to the practice of the Customs Administration, the National Bank credits the Government account immediately with the full amount of funds collected and does not accumulate any reserves. The amounts collected by the National Bank currently represent more than 10 per cent of total govern- ment revenue. The Revenue Administration Most internal revenue is collected by the Revenue Administration, (Dir- ecciQn de Rentas subsequently referred to as "Direecdon"), a major division of the Ministry of Finance hrough which, however, less than half of the total government revenue passes.2 Taxes on liquor and tobacco represent morethan half of the total revenue collected by the Revenue Administration. Collecton of other excise taxes (on sugar, matches, soft drinks, beer and the slaughter tax) account for another 10 per cent. The only other important receipts are from the sale of fiscal stamps (another 10 per cent) and from property and property transfer taxes (nearly 10 per cent). All other taxes, or groups of taxes and fees, yield less than C$100,000 a year each. About C2,000,000 are collected for the communications service (including the sale of postage stamps). 1/ According to a table prepared by the Tribunal de Cuentas, "Movimiento de los Fondos disponibles del Gobierno en el Banco Nacional de Nicaragua durante el ano fiscal de 1950-1951." In the calendar year 1950, of the 43.3 million cordobas (gross) collected by the Customs Administration, 26.9 million were collected in Corinto (Memoria ... 1950, Estado No., 6). 2 The budget table on government revenue distinguishes between customs and internal revenue. Within the second category, all revenues are grouped according to the collecting agency: Revenue Administration, National Bank and Customs Administration. - 35 - The field organization of the Direccion consists of 15 distri-t offices (Administradores de Rentas, subsequently referred to as "Rentas") and of fiscal agencies in the various parts of the country.. With a few exceptions, a district office covers the territory of a department. It combines the functions of a revenue collecting and disbursing office. Funds for govern- raent expenditures made outside Managua are transferred to the local Rentas offices and are disbursed by them. Actually, the local Rentas offices collect only property and property transfer and inheritance taxes, transfer taxes, the slaughter tax and some minor taxes and fees. Fiscal agents are usually local merchants or other persons who receive a relatively modest compensation for their services (in many small localities, only 70 cordobas, or 10 dollars a month). Their num- ber varies with the size of the department; in the largest - Zelaya - there are 14 fiscal agencies. Fiscal stamps and paper are sold by about 120 agents (mostly stores) who have secured a special "patent". They receive an 8 per cent discount on the proceeds of fiscal stamps and paper sold.1/ The Rentas office of Managua collected more than 75 per cent of the total internal revenue. In particular, since most excise taxes fall on products manufactured by a relatively small number of firms domiciled in the capital, these taxes are collected by the Managua office. Receipts of the other 14 offices ranged in 1950/51 from 1,650,000 (granada) down to only 78,000 cordobas (Aladriz). Indeed, 6 Rentas offices collected less than 200,000 cordobas (or less than 30,000 dollars a year). In developing and revising methods of collecting taxes, the convenience of taxpayers should be considered. Two units in the Revenue Administration in Managua are in charge of the collection of excise taxes. One deals with taxes on alcoholic beverages, the other with those on meat, beer, and sugar. The entire staff of the latter section, which is also in charge of administering several other taxes, consists of one chief, three inspectors, a typist and a porter. The entire staff of the Revenue Administration, excluding typists, porters and depart- mental inspectors, numbers 12. We have not been able to stady the procedures followed in collecting excise taxes. Among the excise taxes, only the bulk of the slaughter tax is collected by the local revenue offices rather than in Managua. We understand that the slaughter tax collected represents the equivalent of only about two-thirds of tqe number of animals slaughtered. In view of the relatively 1 Some employees of the Direccion hold such patents and thus, in fact, obtain an 8 per cent discount on fiscal stamps which they sell to tax- payers during the course of their normal duties. - 36 - small number of producers of sugar, alcoholic beverages, and tobacco products, collection of excise taxes on these products involves few problems besides those of efficient control to determine quantities produced or marketed. More can be said about the administration of the property tax which is the only direct tax in the country payable regularly. Assessment and Collection of the Property Tax It is generally conceded that the property tax is assessed on only part of the existing property and that assessments are considerably below their real market value. Taxpayers underdeclare the value of taxable transactions or property, while the Revenue Administration does not enforce complete and honest self-assessment. To illustrate this situation, we discuss below the procedures of assessing and collecting the property tax, the only important direct tax in the country.. The collection of the property tpx is based on self-assessment. All property owners file annual tax declarations (manifiestos) with a local Rentas office or directly with the Direccion in Managua. The declaration is supposed to contain a complete listing of all real estate and other property, owned by the taxpayer, as valued by him. As the tax is payable on the net worth, lia- bilities as well as assets are to be listed. In order to facilitate detection of undeclared property, each declaration contains the names of owners of the property adjoining the taxpayer's property, north, west, south and east. Taxpayers may file either in the local Rentas office or directly with the Direccion. When taxpayers file directly in Managua, the local Rentas office has no means of verifying the assessment of property located in its district; it is not even in a position to ascertain at what amount it has been assessed or whether a given piece of property has been listed at all. It is worth noting that even those foreign firms whose operations are located in * other departments file directly in Managua. There is no general cadastre (apparently not even in the larger cities), and recording of property is voluntary; many property owners make a :ecording only when they sell property. Recording offices exist only in the larger cities. Much of the property changes hands, not only in outlying areas but even in or close to the principal cities, without the benefit of a recorded deed. Since property bought cannot be assessed for less than the sales price (and.also to save transfer taxes, which amount to one-half of one per cent of the sales price, as well as stamp taxes and lawyer's fees), sales contracts are frequently (by autual understanding between the seller and the btiyer) made out for only a fraction of the actual sales price.. Tax returns are reviewed by the local assessment boards (Junta de Informa- cion y Detalle) which consist of three officials, including the Collector of Revene,and are forwarded to the Direccion. The local boards have little latitude in reviewing the self-Assessment made by property owners; they can only recommend a revision of the valuation of the property declared by the taxpayer. They cannot assess any property not declared by the taxpayer, - 37 - unless they possess a documentary proof of ownership (such as a sales con- tract to which a fiscal stamp has been affixed and copy of which is filed at the Rentas office). Thus property owners can evade the property tax by not declaring certain houses, farm land or other real estate owned bi them (particularly where they are leased). Furthermore, the local Rentas office can only make recommendations to the amount of self-assessment on new returns and for additional property reported for the first time by taxpayers who have filed in previous years. The final decision rests with the Direccion in Managua which makes the final assessment on all returns. It prepares a taxroll ("Cuadro B") for each department and sends it to the local Rentas office, The names of the tax- payers are listed alphabetically, together with the amount of assessed property and the amount of tax due. Copies of the original declarations of taxpayers,with all the revisions made, are also attached. Once the assessment of property has been approved by the Direccion and the taxroll is prepared, the local Rentas office can increase the t3tal assess- ment of a taxpayer in subsequent years only if he lists additional -property. Valuation of property already assessed in previous years cannot be increased. If the owner values a piece of property at a lower figure than in the previous year, the previous year's valuation is reestablished, but the property cannot be assessed by the local assessment board at a higher figure. Tax bills are sent out by the local assessment boards under the signature of the Administrador de Rentas in his capacity as a member ("vocal") of this board. All accounting is concentrated at the Direacion in Managua. Taxpayers are frequently delinquent for several years. To collect pro- perty taxes past due, 1.wyers from the Ministry of Finance (who periodically visit the various Rentas offices) send dunning letters to the delinquent tax- payers who are subject to fines. There is, however, no foreclosing of pro- perty for delinquent taxes. The only means of enforcing payment )f property -taxes is to make it impossible for delinquent taxpayers to sell the property or to obtain a license, a legal document or a passport. In order to obtain such documents, a taxpayer tust prove that he has paid property taxes due. The Customs Administration The other important collector of government revenue, the Customs Admin- istration, enjoys a semi-independent status. This situation has its origin in obligations assumed by the Government of Nicaragua at the time of the con- summation of the Ethelburga loan of 1909. It is understood that a projected law, placing the Customs Administration under the Ministry of Finance, is being prepared and that the existing contractual obligations toward the foreign bondholders do not preclude this step. The Collector of Customs (Recaudador General de Aduana) collects all customs revenues as well as a number of import and export taxes, port charges and some miscellaneous municipal revenue in the main ports (including revenue that is transferred to autonomous local funds). The Collector is also in - 38 - charge of the maintenance and policing of ports and the construction and the maintenance of customs houses, light houses and other structures. The Customs Administration meets its own payroll and other expenses from customs receipts (although since 1949/50 they are included in the "gastos adfinistrativos directos" of the general budget). The sums remaining after payment of all costs of the Customs Administration and of the interest and amortization on the Ethelburga loan are paid into the general fund unless the Customs Collector is specifically instructed to make,other direct pay- ments. However, payments into the general ftnd are made at the discretion of the Collector. The Collector retains $uch reserves as, in his judgment, are required against depreciation of customs buildings, for contingencies, for the purchase in the free market of 4thelburga bonds and for unspecified purposes. The cash balance of the Customs Administration is divided among till * cash, deposits at the National Bank in both cordobas and dollars, and deposits in dollars and pounds sterling abroad (for the purchase below par of foreign bonds that might be offered). Some part of reserve balances is invested in United States Government securities. In addition to its own cash balances and reserve accounts, the Customs Administration is the custodian of sizable escrow accounts representing deposits by importers and exrorters, pending the determination of exact amount of duties due and decisions on customs litigation cases. No separate accounts at the National Bank are maintained for escrow accounts (depositos de ganancia) which are merged with general receipt of the Customs Administra- tion. In recent years, several,types of taxes were imposed on imports which are most conveniently collected by the Customs kiministration. In some cases, these were import and export duties disguised as taxes ("impuestos"), pre- sumably to place their proceeds in the hands of the Revenue Administration rather than in those of the Customs Administration. The Customs Administra- tion thus became the collecting agent of the Revenue Administration. It has, however, escaped any close supervision by the Ministry of Finance, even for that part of its activities which represent fiscal agency functions. The Customs Administration does not maintain 4 separate account at the National Ban1c for taxes collected as agent of the Revenue Administration. It does not automatically put into the general fund all such tax receipts and therefore accumulates reserve balances perodically. For instance, of the nearly three million cordobas held in reserve accounts by the Customs Administration at the end of 1950, about one-third represented accumulated internal revenue funds. (See Me,oria ... para, 1950, p. 41, Estado No. 1). The autonomy of the Customs IAdministration has resulted in the co- existence of two practically separate Treasuries. The Collector has been able to accumulate periodically considerable reserves (both in cordobas and in dollars). Not all of these reserves are shown in the Annual Reports of the Collector. - 39 - In view of the recurrent deficits in the general budget, the temptation was strong for the Minister of Finance to draw upon the reserves of the Customs Administration, either by ordering the Collector to make additional payments (which in recent years ranged between 1,100,000 and 4,450,000 cordobas) or to meet from customs reserve funds expenditures which normally should be made from the general fund.-7 Because of a legal provision specifying duties originally in gold cor- dobas (which at the time the customs tariff was prepared were equivalent to dollars), the Customs Administration, which collects part of its revenue in dollars, in its official annual reports has been adding dollars and. cordobas without converting the former into cordobas. Equally, in its internal accounting, the Customs Odministration treats dollars as equivalent to cor- dobas, although the dollar is worth 5 or more cordobas, depending on the applicable exchange rate.2/ In the last Annual Report of the Customs Administration, its total cash balance is shown as follows: Cash.balance 2,906,663.01 (p. 41) Escrow funds 27,673,.62.3 (p. 42) Total 10 5o0025.0 The table in the Memoria, from which the first figure is taken (Estado 1) carries the caption "expressed in cordobas" ("Expresados en Cordobas"). The table from which the second figure is taken is labeled "cordobas". Actually, the label "cordobas" is incorrect. Of the total shown, $466,109.14 represents deposits in U.S. currency and an additional $60,000 deposits in pounds sterling (converted at the rate of U.S. $2.80 1/8 = 115). These have been added by the Administrator without being converted, to a balance held in cordobas amounting to C$10,053,916.26, The true balance (converting $526,109.14 at 7 cordobas to a dollar) is: The Memoria (Annual Report) of the Customs: Administration does not show any breakdown of the payments to the general fund. In view of this and other oircumstances, the Tribunal de Cuentas ias been unable tp untangle the acqounting of the Customs Administration for earlier years. The Tribunal de Cuentaq is, moreover, constantly delayed in closing its accounts. by late reporting by the. Customs Administ7ration. - 40 - Cordoba balances 10,053,916.26 Foreign exchange balances 3,682,763,98 (T21,419.00 - 02 x 2.80 1/8 - US$60,000 plus US)'466,109.14) Total 13,736,680.24 The balance reported understates the true balance by 3,156,654,84 cordobas. Since the Administrator intermingles his own funds with escrow and deposits funds of various nature, it is not possible to obtain a breakdown of the cash balance proper. If we assume that all funds on deposi- are in cordobas, the true balance of the Customs Administration on December 31, 1950 was 6,063,317.35 cordobas, or more than twice the figure shown in the Memoria. b. The Cost of Collection The costs of collecting internal revenue are high. The 1950/51 budget assigns 2.3 million cordobas to the Revenue Administration to collect 32.1 millions of taxes. This is a cost ratio of 7 per cent, even without allo- cating to collection expenses a proportionate share in over-all expenditures of the Ministry of Finance, or those of the Accounting Office. The per- centage is about the same, if not higher, when the comparison is based on closed accounts of recent years rather than on the budget for 1951/52. The Nicaraguan ratio of 7 per cent compares with 2.4 per cent in Bolivia, 5 per cent in Guatemala and about 5.6 per cent in San Salvador. c. Control and Auditing The control of government revenue is vested in the Accounting Office (Tribunal de Guentas).17 The Accounting Office receives every five or ten days (depending on the importance of the reporting office) an itemized tele- graphic report of receipts and disbursements of the various Revenue Offices (which deposit their net receipts at the local or nearest branch of the National Bank). Fiscal accounts of unicpalities (of which there are about 120) are audited by the Municipal Control Office (Controlaria Municipal) of the Ministry of the Interior (Gubernacion). The auditing is conducted, at ir- regular tntervals, by traveling auditors of the Control Office. The municipalities are assessed for this service, for the benefit of the general fund of the Treasury, at 5 per cent of their gross revenue. All new municipal taxes have to be approved by the Mihister of the Interior who usually consults informally with the Minister of Finance; the final decision, however, rests exclusively with the Minister of the Interior. - 41- A division of the Accounting Office (Sala de Centralisacion de Cuenta$) checks the reports of the Revenue Offices and of the Customs Administration for internal consistency and prepares monthly summaries of receipts from individual taxes by collection office. For a reason which we have been unable to determine, some types of revenue collected in Managua (such as excise taxes) are all6cated to other revenue offices whose statistically recorded receipts thus appear to be much higher than actual collections. The fiscal agencies deposit their collections with one of the 15 revenue offices each of which is responsible for the operations of the agencies it its department. All fiscal accounting is on a cash basis. Receipts are posted when reported telegraphically, but the lag between reporting and actual deposit of fund at the head office or branches of the National Bank is relatively short.1! Expenditures are charged when checks are issued (the Treasury carrying at the National Bank an account for checks issued but not paid). 0 The supervision of Revenue Offices is at a minimum, the telegraph being the main medium of communications between the Ministry and the local Revenue Offices. The Revenue Offices are periodically examined by travelling inspec- tors of the Sala de Glosa, one of the three divisions of the Tribunal de Cuentas. Because of its independent status, the Customs Administration has so far not been audited by the Tribunal de Cuentas. The accounting of the Customs Administration has been extremely involved, and is not audited by any outside agency. The Constitution (Article 266) requires that final audited accounts (liquidacion) be submitted to Congress not later than 30 days after the end of the fiscal year., This provision has not been complied with in recent years. Final accounts have been submitted (but not published) after a con- * siderable delay. In discussing the assessment of direct taxes, we have pointed out that all final decisions are reserved to the Collector of Revenue (Director de Ingressos). There is no court of tax appeals before which litigation cases are heard or tax fraud prosecuted. Taxpayers cannot appe 1 against deci- sions of the tax administration to an independent court. There i3, however, a customs court which deals with all litigations arising from the administra- tion of the Customs Tariff. 1/ It is recalled that customs receipts are available for meeting general budgetary expenditures not when actually collected, but when transferred by the Collector to the account of the Ministry of Finance. The "court of appeals" consisting of the Revenue Administrator, the chief of the section of the Revenue Administration in charge of the collection of the property tax, and its secretary (Ley del Impuesto sobre Capital, Art. 22) cannot be regarded as an independent judicial court of appeal. - 42 - 4. Recommended 4efor: of the Fiscal 3ystem The main objectives of the fiscal reform and the main recommendations were outlined in the Summary (pp. 8,13), In the following section, a more detailed discussion of the principal recommendations is given. In order to make the discussion as concrete as possible, we have dealt with administra- tive aspects of the existing situation and of the proposed reforms as well as with their rationale. a. The Personal and Corporate Income Tax We recommend the introduction of a progressive income tax on personal , and corporate income as the logical foundation of a modern, equitable and elastic fiscal system. The income tax should be applied to all physical and legal persons in * the country. Non-profit institutions (religious and charitable) should be exempt from all taxation (as under the property tax). - One single law could be enacted to cover individuals as well as corpora- tionp, but at different rates. Alternatively, two separate tax laws, one for personal and the other for corporate income, could be enacted. As there is no .material difference between the two techniques, the following dis- cussion,is based on the second alternative. The Personal Income Tax The view is frequently expressed that in a country like Nicaragua it is impossible to administer a general income tax and that one is reduced to taxing specific products or transactions. Any system of several independent taxes on specific types of income is ound to be less equitable than a single income tax yielding the same revenue. - In filing a single income tax return, an individual can offset losses against income from other sources. No such netting-out is normally possible under a system taxing incone from specific sources. If he were taxed on each single product, a cotton grower who suffers losses might still have to pay a tax on cattle raised or coffee produced, while in computing his total income he might find himself below the exemption level. All special taxes on income from specific sources are bound to be branded as discriminatory. More important, they are likely to leave untaxed important sources of income and to preclude (or at least to make very diffi- cult) the inclusion of such features as examptions for dependents, c arry- overs of losses and deductions for unusual or socially desirable expendi- tures. All these points have been made vigorously by representatives of various farmers, organizations and private citizens during the recent dis- cussions at the time of the passage of the tax on gross income from cotton and coffee. In recommending the prompt enactment of a general, mildly - The special taxes on net income from coffee and cotton, which the Mission has recommended, are nothing more than stop"gap measures. -43 - progressive personal income tax as the only equitable and realistic alterna- tive to separate taxes on income from individual products, businesses or professions, we are proposing a solution which in recent months has gained wide acceptance in many important groups of the population. The personal income tax should be simple and have a relatively high exemption. It should be only mildy progressive. Maximum yield should be sought through complete coverage (of nationals as well as of foreigners employed or conducting businesses in Nicaragua) rather than by steepness of progression. The exemption should be generous, at least at the beginning. The initial figure of C$25,000 for a married couple might be considered, for review when more experience has been gained in assessing income, auditing returns and collecting taxes. Provision should be made for easing the tax burden of large families by providing additional exemptionsfor dependents (for instance, for each child after the third). A possible range of rates would be from 5 per cent for the first bracket (C$25-50,000) with a top of 15 per cent for annual incomes of over 1,000,000 cordobas. The whole problem of exemptions and rate structure should be studied carefully after collection of the necessary basic statistical material on the income distribution in the higher brackets. We believe that in view of the relatively small number of individuals likely to be subject to this tax (probably fewer than 10,000 if the exemption is C25,000) adequate infor- mation for preparing tax rolls could be obtained from the records oC the Revenue Administration (property tax returns), the Department of Agriculture,, the Customs Administration (which maintains a list of importers and exporters) the National Bank, the Mortgage Bank, and from other sources. A large part of the national income of Nicaragua is produced in agitoul- ture or trade, Fincas and plantations are normally operated as sole owner- ships, although in some cases several members of a family have an interest in the same property. In a country such as Nicaragua, it is practically impos- sible to draw in agriculture a line between private and business income. Income from farming and trade will have to be taxed under the provisions of the personal income tax (except for plantations and trade firms operated as corporations). Joint returns by husbands and wives should be required (as is the case for the property tax; see law on "Impuesto Directo Sobre el Capital," Art. 10) and proper safeguards should be taken to defeat tax evasion by splitting entrepreneurial and property income between several members of a family. In order to channel the greatest volume of savings into productive invest- ments, a provision might be inserted permitting deduction from net income of funds invested in bonds and shares of the Instituto de Forento, of its sub- sidiaries and possibly of other qualifying industrial enterprises. Such qualification (to be obtained from the National 3oonomic Council, or from the Director of the Instituto de Fomento, or from some other appropriate agency) should be made dependent on the contribution of the enterprise to the economic development of Nicaragua. Similarly, in order to stimulate development and improvement of farm land, appropriate deductions might be granted corresponding to the cost of clearing, terracing and irrigating land, Likewise, deductions might be grantei to stimulate acquisition of farm machinery and other prodictive farm investments. -44- Appropriate safeguards should be taken to avoid misuse of these provisions, by specifying for instance, that such deductible investments cannot exceed 50 per cent of net taxable income. Instead of exempting such investments entirely, it might be sufficient to make them subject to the first bracket tax rate only (or to only half of the first bracket rate). If such investments are liquidated within a specified period, the corresponding amounts should become taxable at the marginal rates applicable in the year when such investments were made. Another possibility fQr using the income tax indirectly to foster channelling of savings into developmental expenditures would be to exclude from taxable income dividends from the Instituto de Fomento (and its sub- sidiaries). Simultaneously with the introduction of the general income tax, special taxes on coffee exports, net income from coffee and cotton and on cattle exports should be amended. Special taxes on producers of the principal export crops are justified by: 1. the special efforts made by the'government on their behalf, 2. the fluctuating character of world prices of such products, combined with relatively stable production costs, 3. the need to draw upon resources of existing industries to develop a balanced domestic economy. Taxes on these crops should be rather modest in years of average production and world prices, They should, however, be sharply progressive if there is any widening of the margins between world prices and production costs in order to syphon-off'a substantial part of any windfall, profits that might occur as a result of crop failures abroad; internaticnal developments or exceedingly abundant crops in the country. Provisions should be made for averaging farm income over several years, either by carrying back losses only or by averaging net incomes over, say, a three to five year period. In making the above recommendations, full account has been taken of the difficulties of administering an income tax in a country of the economic and social striucture of Nicaragua. There are no illusions about the possibilities of evasion. In view of past exmerience with the property tax, any endeavor to obtain trustworthy and complete tax returns for the present must be discounted. -e feel, horever, that within a period of three years, the tax can be made fully effective by enforcement of sufficiently complete returns and by putting on the tax rolls all persons receiving income above the exemption limit. Subsequently the numiber of taxpayers, at the beginning limited to the relatively small number in the uppermost income brackets, could be increased by lowering the exemption limit. Thus, gradually the fiscal system could be made more flexible and a further shift from reliance on indirect to direct taxes could be achieved, 45- The Corporate Income Tax There are relatively few corporate enterprises in Nicaragua. At the present time, the only form of taxation to which they are subject is the property tax. .hile there are no statistics available on the total amount of taxes paid by corporations, they are likely to be very small. The corporate tax should be imposed at a rate of about 20 per cent. It should be slightly progressive by granting an exemption for very small corporations (with an income of, say 50,000 cordobas). Attention is directed particularly towards the very light tax burden borne by foreign companies which enjoy the various privileges granted to the individual concessions (and which will be discussed more fully in the general report of the !ission). The 15 foreign mining companies are paying property taxes on a total capital amounting to only 23.2 million cordobas, or .3,332,000. This compares with gold and silver exports in 1950 of 8.2 million dollars. However, this official figure represents an underestimation of actual gross receipts of the foreign mining companies since most gold was sold in the free markets at prices above 35 dollars an ounce, which is the official valuation for exports. In other words, the foreign mining companies were paying property taxes on a capital which amounted to less than a third of their gross receipts and was probably smaller than their annual net income, Property taxes paid by all (36) foreign corporations operating in Nicaragua amounted to only 218,000 cordobas, or a little over 30,000 dollars a year. While foreign concessions are protected from new taxes for the duration of such concessions, the objective of attracting additional foreign capital should be achieved by putting foreign enterprises on equal competitive footing with domestic capital (to which much higher rates of return are available than in advanced cquntries), and not through special long-term privileges which might turn out to be out of proportion with the benefits derived by Nicaragua. In order to stimulate new industries, special tax concessions might be required, but these should be granted to foreign and domestic corporations alike. Inflexible long-term concessions, binding the Nicaragua government for extended periods, should be avoided in any event. The law should provide for fair treatment of foreign companies taxed abroad, but in all other respects such companies (to the extent that they are not protected by existing long"term concession contracts) should be treated on a par with domestic companies. U. S. companies taxed in Nicaragua will be able to offset the higher U. S. corporate taxes by the amount of taxes paid in Nicaragua. The principle of sharing of profits between foreign concessionnaires and the Nicaraguan government should be established. This is, perhaps, - 46 - the most equitable method available to Nicaragua of attracting foreign capital and technicians while permitting the country to share some of the profits, particularly if these turn out to be above expectations. In the case of successful operations, the government should ob,ain its share in profits of foreign enterprise, which under favorable circumstances might represent a very high return on capital invested, not through specific taxes, but by sharing profits on a sliding scale. The higher the profit (above a minimum amount representing a fair return an invested foreign capital which does take higher risks than investments at home), the higher should be the share of the government. Such provisions are currently in operation in many countries with considerable mining resources (for instance, in Texico) and the "ission is ready to provide pertinent information and suggested schedules of rates. Profit sharing in lieu of income taxation should be applied in the first place to mining and lumber companies, but could be applied to plantations and all types of foreign enterprises which, by the nature of their business, require special contractual arrangements with the NVicaraguan government. Receipts from income-sharing with foreign concessions might be allocated to the Instituto de Fomento. The present export taxes on gold, timber and bananas should be applied only to concessions which have not signed profit sharing agree- ments. Lxport taxes should be payable in foreign exchange. A special report on taxation of gold mining companies, which account for such a large proportion of Nicaraguan exports, will be submitted separately. b. Property and Property Transfer and Inheritance Taxes Instead of yielding only little more than 3 per cent of total tax revenue, property taxes, even at present low rates, should, if properly enforced, yield at least 10 per cent. A moderate increase in property rates is recommended belomw The property tax (Impuesto Direqto sobre el capital) The property tax is now largely evaded, either by under-valuing property or by omitting from the annual return part of the property held. It should be one of the pillars of the Nicaraguan tax system. Instead of yielding slightly over 2,800,000 cordobas, it should yield at least ten million at present and twenty million cordobas at the proposed- rates. The property tax should be only very mildly progressive, mainly through the provision of a minimum exemption. The rate on owner- occupied homes should be increased to at least 1/2 of one per cent from the present rate of 1 per 1000. The higher rate is amply justified by the fact that the property tax is implicitly also a tax on that part of imputed income which the owner derives from occupying a house rent-free, In many countries (for instance, the inited KingdQm) taxable income of a home-owner is defined to include the estimated value of imputed rent, The rate on other property should be increased from the present 6 1/2 per - 47 - thousand to 1 per cent, with the exemption increased from C$3,000 to ch5,ooo. 1. Low nroperty taxes encourage holdings of land for prestige and speculative purposes. Yuch of this land is idle or not used to the best advantage. In view of the reluctance of many owners of large tracts of land to engage in productive pursuits, thus refusing to contribute their share to the development of the country, accumulated wealth fre- quently takes the form of idle land holdings. The obvious result is a continuous increase of land prices reflecting primarily the abundance of capital seeking safe and painless investment, sheltered from taxation and vicissitudes of the value of the cordoba rather than the increased use of land for productive purposes. In addition, it produces a chronic unsatisfied demand for bank credit to finance acquisition of more land and this adds to the continued inflationary pressures in the country. Borrowing of money at 2 per cent a month to buy land endlessly feeds the spiral of rising land prices. The property tax should be high enough to force owners of land to obtain a minimum economic return or to sell it to individuals who would be willing to apply enough effort and capital to obtain such a return. Alternatively, a surtax on non-income earning real property should be considered in order to compel owners of land which is not cultivated to lease it or to cultivate it themselves. Such a surtax would accomplish two purposes: a. it would compensate the Treasury for the loss of tax revenue which would have been collected if the owner obtained a return on his land, and b, it would discourage speculative buying and holding of land which absorbs funds which should go into productive uses. 2, Drastic measures are needed to enforce a realistic appraisal of real estate and other property. To achieve a given yield, the alternative to higher rates is widening of the assessment basis to include all property that should be on the tax rolls. High rates penal- ize those taxpayers who honestly declare the full value of their pro- perty. The present situation has apparently developed because: a. By and large, taxpayers declare property at only a fraction of its true value. hven when the original tax return is drastically revised upward by the Revenue iidministration, the property owner who makes an unrealistically low self-assessment is still likely to be assessed at less than the actual market value. b. Once a property is on the tax rolls, any subsequent increase in its value, even if it results from improvements and other capital investments, does not, as a rule, lead automatically to an upward revision of the official assessmentf o, No generally established minimum appraisal rates or schedules - 48- are in use. d. Penalties for non-declaring or underdeclaring of property are not high enough to enforce compliance with the letter and the spirit of the law. e. Cooperation between the local assessment boards, the Direccion in Managua and other agencies which should be of great help in obtaining a complete and realistic appraisal of property (such ap the National Bank, the Mortgage Bank, the Recorders of Real Property, the Departments of the Interior, of Public 7orks, and of Agriculture) is practically nonexistent, Several measures to obtain a complete listing of taxable property and realistic assessments may be taken: . a. MTinimum appraisal values may be set on the most widely dis- tributed types of property, such as urban real estate, various classes of farm and timber land, houses and other structures, tractors and other implements, cars and trucks, cattle, coffee trees (in production and not yet in production), etc. Those tables, for the guidance of tax assessors, should be fairly detailed (for instance, the value of coffee trees might be graduated according to average yield; the value of automotive and farm equipment according to age, etc.). They should be reviewed periodically. b. A provision may be added to the law on property taxes giving any person and government unit the right to bid for a property at, say, twice the value declared for tax purposes. The bid would become effective after the next filing date, thus giving the owner a chance to revise his valuation upward, Free access to (or even posting or publication of) property tax rolls would be required to enforce such a provision. c. Recording of all real property (at Registradores de la Propriedad Inmueble) should be legally required and vigorously enforced. A complete cadastre of ur qn and rural property should be prepared within a reasonable time.t The existing records obtained recently during the DDT campaign could be used for this purpose. Tax assessors should have unlimited access to property and all related records. d. The National sank and the Iortgage Bank may be instructed to base credit appraisals on property values declared for tax purposes. According to existing legislation,_ a copy of the list of individuals and firms subject to the property tax should be deposited with the National Bank. We understand, however, that this is not actually done 1/Ie note that the government is currently engaged in compiling, for the first time, an inventory of all government property. V Reglamento del Impuesto Directo Sobre el Capital, Art, 48b. - 49 - at the present time and that the National Bank does not make use of propertj values declared for tax purposes when appraising the credit worthiness of prospective customers. Thus, the owner of a coffee finca may declare to the tax authorities that his net worth is 20,900 cordobao and file with the National Dank a loan application estimating his net worth at 100,000 cordobas. e. All property should be reappraised periodically. A program for reappraising all types of property at least every five years should be developed. f. A2l property should be assessed in the department in which it is located, in order to permit visual examination by appraisers, When individuals and business firms list properties in more than one department, the appraisals should be made locally, but computation of the tax, billing and collection should be centralized, g. Foreclosure for nonpayment of property taxes should be enacted. Penalties for non-listing of taxable property should be raised and effectively collected. In view of the general under-reporting and widespread non- reporting of property, we feel that all the six measures outlined above should be taken. The goal should be to prep!re complete and realistic assessment rolls.. To achieve this objective, the assessment boards should be revitalized and adewnately staffed. In departments covering wide areas, use should be made of travelling teams of appraisers and of the personnel of fiscal agencies. I e believe that with adequate training of the personnel of the Assessment Boards, with allocation of sufficient funds, with able, impartial and independent central supervision the task of completely revising the present "Cuadro B" could be achieved within a three-year period, Already after a year's work, property tax rolls are likely to increape to a multiple of the present amount of less than $0 million cordobas, and in three years the amount assessed is likely to rise in the neighborhood of 3-5 billion cordobas, The property transfer and inheritance tax (Impuesto sobre derechos reales) The rate of the transfer (sales) tax for immovable property is a flat 1/2 of one per cent, The inheritanqe a:d gift tax is graduated according to the degree of parentage; for spouses and direct descendants and ascendants it ranges between 1/2 per cent for legacies between 500 and 3,000 cordobas (;'71 to h29) to 7 per cent for those exceeding 500,000 cordobas (%71,430). For the middle range of 50 r 100,000 cordobas (!7,143 - 14,286), the rate is 2 1/2 per cent. The correspond- ing ranges for the most distant relatives and strangers is between 3 and 15 per cent, the rate for the middle bracket being 8 per cent, These rates are very low. In comparison, in San Salvador the - 50 - rate on property transfers is 1 1/2 per cent, or three times as high as in Nicaragua. The inheritance and gift taxes range in San Salvador from l.k to 20 per cent for close relatives and between 12.4 and 50 per cent for distant relatives and unrelated nersons (or,again, three or more times the level of Nicaraguan rates). In Bolivia, rates for the highest brackets range from 10 per cent for transfers to spouses and children to 33 per cent to strangers, The increase in yield in the two last fiscal years was modest, with the result that the relative contribution of all property taxes to total tax revenue declined from 5.0 per cent in 1945/46 to 3.4 per cent in 1950/51. Iith the increase of real estate and other property valuations as a result of a rigorous enforcement of the property tax discussed above, the yield of the property transfer tax would increase even without raising existing rates. .e recommend raising of the present rates on property transfers and gifts as well as for the inheritance tax, 1. The yield of the property transfer tax is currently reduced by the practice of drawing up sales contracts for a fraction of the actual sales price to save on taxes, stamp duties and lawyer fees. Also, since property transfer taxes are collected only by the Revenue Offices, transfers in smaller communities are generally not taxed. Collection could be increased if this tax were payable also at fiscal agencies. 2. The property transfer and gift tax shovld be modifiec to include features of a capital gains tax. Successive increments in the value of real estate (with allow- ance made for improvements actually made), both rural and urban, should be taxed when title is transferred at fairly heavy rates, To dis- courage land speculation, increments in value should be taxed at higher rates when the holding neriod is short (say, less than one year). 3. The possibility of shifting from the present inheritance tax to an estate tax should be studied. Collection of an estate tax is cheaper. The estate tax can be assessed more easily and settled much more quickly than an inheritance tax, as location of all heirs and the determination of their respective shares may take considerable time. Alsc, progressive rates can be made effective more easily in the case of an estate tax, c. Business Taxes He have already commented on the extremely light taxation of business. There is no general business income tax. Some types of business, in particular those producing primarily for export, are subject to special taxes on the quantities or value of products exported. Domestic trade, manufacturing and--prior to the recent imposition of the - 51 - tax on net income from cotton-the entire agricultural production other than coffee have remained free from even indirect taxation of incomei Other national taxes falling on business are exceedingly smalle Some types of establishments are subject to special taxes or license fees, while others, in similar lines, are not Thus, movie theaters, drug stores, producers of alcoholic and soft beverages and foreign trade houses are subject to special taxes, while all other types of manufacturing (including sugar and textile mills, cement factoriesy hotels and inter-city transportation) are not. Trade establishments pay a very small combined gross sale and pay- roll tax. This tax is payable by all retail and wholesale establishments with annual gross sales of "! ,.000 (710 dollars) or more It is levied on: (1) cash sales, (2) reduction of credit balances, and (3) total payrolls. Several types of merchandise, such as unprocessed food, are exempt. The tax rate is 2 per 1000. Thus the total business taxes paid by a trade establishment with annual sales of a-bout five million cordobas and about one hundred employees is 11,000 cordobas, or 1,.500 dollars a year. It is generally thought that many merchants under-report thDir sales and that many establishments whose sales volume exceeds the exemption limit by not too large an amount dont pay this tax at all. Obviously, in a country where bookkeeping is at best haphazard and the payment of the sales tax is hardly enforced in cities in which no Revenue Offices are located, evasion must be considerable,- While books of the merchants are supposed to be inspected by collectors (at least in Managua), it is by no means certain that this generally is done.. The inspectors are not regular employees of the Revenue Administration, they are free-lance collectors who are able to secure a "patent" (against a nominal fee) and who obtain their compensation from an 8 per cent dis- count (11honorario") on the amounts collected. 11eedless to say, all sorts of arrangements between taxpayers and collectors are possible under such circumstances, not all of which involve actual inspection of accounting records. 7:oreover, in order to secure a patent a collector does not have to pass any examination or prove any knowledge of account- ing. It is clear that this system is wide open to abuse. It should be replaced by direct filing of tax returns by stores.. The tax should be payable in cash or by check drairn to the order of the Revenue Administration, rather than by purchasing fiscal stamps and pasting them on returns, to be cancelled by inaspectors who frequently are also sellers of these stamps... Books should be inspected by periodic,-un- announced spot check by trained inspectors accountants.on the payroll of the Revenue Ildministration. Liscounts should be abolished.. The same recommendation ap:lies to the tax on admission tickets to movie theaters. The a6ainistration of taxes on admissions could be simplified by:. - 52 - 1. unifying the three taxes presently levied, one of which is payable in fiscal stamps, and 2. unifying the bases of assessment (of which there are now three). If necessary, the receipts from the tax on admissions could then be earmarked, according to a formula, for the various purposes for which the present taxes are levied. Licenses Many types of business renuire a license (the names vary: such terms as licencia, matricula, inscription and patente are used. The rationale of such licenses usually is that these particular types of manufacturing or trade establishments require special supervision, periodic examination or investigation before permission to open for business is given, The whole system of licenses needs to be re-examined, hen the output of an industry is heavily taxed (such as the alcoholic beverages, beer and soft drink industries), the payment of a relatively insignifi- cant monthly "patent" fee has little justification, In general, the practice of frequently renewable licenses offers an opportunity to exact from business men "on the side payments", and permits other abuses, Annual license fees are not graduated according to the size of establishment and are, therefore, regressive, They represent a relative- ly heavy burden for the small businessman, but are a negligible item of expense to the large producer or trader. 7ith the introduction of a general income tax, the need for licenses as a means of taxation of business will no longer exist. It is recommended that free registration (or a nominal fee) be substituted in all cases when maintenance of complete and up-to-date records-of certain types of business is renuired for regulatory or inspection purposes, Compliance should continue to be enforced by fines. Fiscal Stamps and Paper (Papel Sellado y Timbre) Although the relenue from stamp taxes in the narrow sense (excluding such taxes as the tax on gross sales of stores and receipts of movie theatres which, for convenience or other reasons, are paid by affixing fiscal stamps but which would and should be collected through other means) is not reported separately, it must be very small. In 19505/1, total net income from fiscal stamps was 3.2 million cordobas, but it is likely that nine-tenths or more of this amount should be credit- ed to the collection of the sales taxes and of the taxes on admissions, At the present time, all sorts of documentary evidence, 3uch as' bills, receipts, checks, mortgages and even academic degrees andI military commissions must bear a fiscal stamp in order to be valid. As the stamp tax is proportionate to the amount involved (usually 1 or 2 per 1000), it is common practice to draw up contracts (as well as bills and receipts) for only a fraction of the actual sales price (thus reducing the amount of the property transfer tax and of legal fees as well). Many stamp duties are collected only spasmodically (usually when the document requiring affixing of a fiscal stamp has to be pro- duced in court or before some government officer)-. Others apply to specific legal documents (required in adoption, divorce, naturalization or other proceedings) rather than to general business transactions;. The taxation of business transactions as such (rather than of the income resulting from them) is a carryover from a semi-feudal economic and social system. It is, in many cases, an obstacle to smooth and efficient flow of business transactions and is at best a nuisance without being a lucrative (and rational) source of government revenue. The fact, that all legal acts ("escrituras") are onerous makes for their avoidance. The whole system of stamp taxes should be reviewed to determine whether its preservation in a modern tax system can be justified. In any case, the list of rates should be reviewed with a view to:- 1. eliminating from taxation those transactions on which rates amount to only a few centavos. Rates which yield very little in relation to their collection costs represent a disproportionally heavy burden on consumers.. 2.. consolidating stamp duties with other types of taxation-. Thus a license, to be valid, should not reauire affixing of a fiscal stamp.. If necessary, fees for licenses should be adjusted upward to include the equivalent of the present stamp duties. 3, The present practice of granting an eight per cent di3ccunt to vendors of fiscal stamps (and stamp paper) lends itself to abuses.. Although this discount logically is intended only for non-government vendors., apparently, in some cases, government employees obtain the necessary patent and sell fiscal stamps directly to taxpayers and retain the 8 per cent discount, iscal stamps should be sqld through all post offices (as is done in many countries using fiscal stamps).. This will bring fiscal stamps (and paper) within easy reach of all taxpayers and save the government the expenditure for honorarios amounting to more than half a million cordobas a year, or three quarters of one per cent of net government expenditures. Transportation The future of Nicaragua depends to a large extent on the develop- ment of its transportation system. It is necessary to examine the extert to which existing taxes on various types of transportation encourage or - 54- hinder the exchange of goods between the various parts of the country and in which way they contribute to the maintenance and development of an efficient transportation network. (A special report on this problem is being prepared by the International Bank for Reconstruction and Development)* In recent years, the largest increase in the volume of goods transported has been in trucking. The extension of a modern highway system is now under-way. The completion of the strategic sections, in particular those financed partly by loans from the International Bank for Reconstruction and Development, will give trucking an even more prominent position than at the present time. Present transportation taxes include; (a) a tax on passenger tickets, (b) a railroad freight tax, (c) automobile license fees, (d) licenses for all other types of vehicles, (e) a monthly highway use tax of C .l.20 and (f).sailing permits for boats,. The latter two taxes are apparently not generally enforced,, if at all. It is striking that while all sorts of assigned taxes abound in Nicaragua, the only logical earmarking.-that of the proceeds of the gasoline tax for road construction and maintenance (an established practice in many countries, including the United States of America)--is conspicuously lacking., 7We recommend replacement of the flat C,.1.20 highway use tax by a graduated use tax, falling mainly on commercial trucking and bus lines (inter-city transportation). Trucks used by farmers and ranchers (to bring crops to the market and to transport supplies to the farm) should be subject to relatively light annual taxes. Commercial trucks should be taxed in proportion to mileage and to loads carried. This type of taxation should be used to enforce maximum load limit (as heavy trucks and excessive pay loads damage roads not intended to carry them). The railroad freight tax falls largely (and the relatively heavy charges for the use of the port of Corinto - exclusively) on goods entering foreign trade. In agreement with the over-all objective of reducing indirect taxes and simplifying the tax structure, repeal of this tax (or at least its incorporation in freight charges, since the railroad is government-owned and.all increases in its net income ultimately accrue to the Treasury) should be considered, as well as a lowering of port charges in Corinto, The small taxes on sailing permitsilare apparently not actually collected and should be abolished. 1/Catalogo Oficial, Numero ?35. - 55 - d. Excise Taxes and Customs Duties The large share of government expenditures is borne by the lower and lowest income groups mainly in the form of heavy excise taxes and customs duties, e have seen that the proportion of revenue derived from these two sources is in the neighborhood of 85 per cent and that the precise extent of regressiveness of the Nicaraguan tax systen is difficult to appraise because customs duties constitute such a large proportion of government revenue. Because of the obsolete character of the Nicaraguan tariff and the deficiencies of import statistics, it was impossible to obtain a breakdown of duties by category of merchandise. This very uncertainty of the incidence of the tariff makes it desirable to de-emphasiZe as much as possible customs duties as a source of fiscal revenue, The overwhelming bulk of the disproportionally heavy duties and taxes on imports falls directly on consumers, as agricultural and other machinery is imported duty free, while imports of raw materials (except for fuel) are negligible in view of the undeveloped state of the Nicaraguan industry. As there are no excise taxes on luxury items, excise taxes fall on the broad masses of tne population and are highly regressive. hatever the origins of the present situation, it is clear that in shifting part of the burden of consumption taxes from the poorest to those able to pay customs duties and internal excise taxes should be considered jointly. The problem of whether to tax at the point of entrance or on the final distribution level is one of expediency, not of principle, In most cases, it will be more convenient to place the levy on the import stage, to minimize evasion and to reduce the cost of collection. M oreover, it is easier to control luxury imports in relation to the foreign exchange situation when the tax is levied at the time the item enters the country rather than when it is sold4 On the other hand, the upper income groups save a very large proportion of their income and a large proportion of their expenditures consists of items that are not easily made subject to luxury taxes. Expenditures for servants, maintenance of several homes, ownership of cars and refrigerators, and foreign travel are some of the items which account for a relatively high proportion of expenditures of the highest income groups. It would be difficult to tax some of these forms of luxury - or even conspicuous - consumption, although it might be possible to impose new taxes on some types of expenditure typical of the upper income groups. The revision of the taxation of consumers must, therefore, be two- pronged; 1. Excise taxes on masa-consumptiqn goods, must be repealed or reduced substantially, if necessary by steps, even though such reductions will result in a substantial drop in government revenue. Taxes on sugar, - 56 - meat (slaughter tax), soft drinks, and matches should be either removed or reduced drastically. Regulatory aspects of the slaughter tax can be met in other ways. The tax on matches, collected by -he match monopoly by adding a substantial resale margin (in contras- to other countries using this device, the Nicaraguan match monopoly is not engaged in manufacturing) is regressive. The government has already announced its intention to reduce most consumption taxes. The maximum amount that would be lost to the Treasury (and become available for spending largely by the poorer parts of the population) would be less than 3.5 million cordobas (the estimated current yield of the sugar, slaughter and soft drinks taxes combined, plus the sales margin of the match monopoly), considerably less than could be recovered by rigorous enforcement of the property tax at present rates. The policy to be followed regarding taxes on alcoholic beverages involves considerations of social and economic progress, not only of fiscal yield. ..e, therefore, do not feel that any specific recommenda- tion can be formulated in their regard, except to draw attention again to the exceedingly hi 4 proportion of government revenue which they have provided in the past..;V In appraising the incidence and the progressive- ness of the Nicaraguan fiscal system as a whole, the heavy indirect taxation of the lower income groups via heavy taxes on alcohol (only mildly mitigated by apparently rather wide use of bootleg alcohol) should be taken into account. 2. The customs tariff should be thoroughly revised to lower duties on articles of mass consumption and to offset, in part, these losses of revenue by raising duties on luxury goods. e. Miscellaneous Taxes and Fees This category, in spite of the number and variety of taxes and fees involved, yields a negligible part of total government revenue. Some of these taxes have been dealt with in the preceding section. Others are collected mainly for regulatory purposes (such as dog licenses and licenses for fire-arms) or represent fees which are also encountered in the most advanced countries (such as automobile license plates or boat registration fees). There are, however, several taxes on the books which are not actually collected. The whole list of such inor tcxes (listed conveniently in the Catalogo) should be reviewed,.22 f. Nontax Revenue 1. Besides the match monopoly, the telephone and telegraph !/The recent decline has been due to the imposition of new taxes, not, to a decrease in the absolute amounts raised from this source. As a matter of fact, new surtaxes on alcohqlic beverages (and tobacco) were imposed as recently as 1909/5Q, /we think of such items as Iiatriculas de Lamparas de Gaza dating from 1917, See also above, p,54, footnote 1. -57 - service is the principal business activity of the government, It probably should continue to be attached to the post office and operated directly by the government (which is one of their largest users). The operations of the communications service should be placed on a business accounting basis. All other business activities of the government, most of which are a heritage of wartime shortages, should be liquidated (most of them are being wound up) or transferred to the Instituto do Fcmento. .2, The government derives surprisingly little revenue from the sale and lease of government lands. The absence of an inventory of public lands and of any office specifically in charge of the valorization of government land are possibly important explanations, although the uniform sales price is unrealisticly low (1 cordoba per manzana). Concrete plans should be developed for taking the greatest possible advantage of the opportunities for leasing government land, In areas to be opened up by the construction of new roads, sales should be made final only upon appraisal of the real value of the land after completion of the entire road improvement and not only of the section on (or near) which the parcel is located.. Sqles orices of government land should be raised upward and graduated. The main objective of this program, however, should not be narrowly fiscal. The aim should be to raise the taxable wealth and income of the.country by increasing the area under cultivation (or other productive use) and to avoid any situation whereby land specula- tors reap the fruits of public development expenditures. 5. Recommended Reforms of the hevenue Administration The administration of the recommended individual and corporate income taxes and the thorough reorganization of the administration of the property tax will require a considerable expansion of the personnel of the inistry of Finance and development of new administrative procedures. Je recommend the appointment of a technical advisor to the Minister of Finance to cooperate in the devel6pment of appropriate methods aRd techniques, in the selection and training of the staff, and in setting up of appropriate machinery for an efficient aMinistration of the new income taxes, This technical advisor should be responsible directly to the President. The shift of the emphasis from indirect to direct taxation will require better trained officials in the tax administration than are now available. It is easier to collect a tax defined in terms of so rany cordobas per physical unit produced or sold, or to sell fiscal stamps to those taking the initiative of buying then, than to verify income or net assets of individuals (many of whom are engaged in business, independ- ently or with associates) and of business firms. To administer the present tax system of Nicaragua, honesty and knowledge of arithmetic are the two essential aualities. To administer a system based largely on income and property taxes, there would also be required a knowledge of business organizations and practices, together with imagination and initiative. The Ninistry of Finance not only will have to recruit additional capable personnel, but also will have to institute a comprehensive program to train officials capable of auditing returns as well as inter- preting tax laws and assisting taxpayers in preparing them properly.. An efficient staff must be trained to audit all returns and to detect under-reporting, evasion and fraud. This is not a task which can be accomplished overnight, but it is essential that the introduction of the fiscal reforms recommended be accompanied by the training of a competent and efficient staff and by the organization of appropriate units within the Revenue Administration to make the functioning of the new tax system a success from the very start.- Only an impartial and efficient staff will be able to obtain the respect of taxpayers and the confidence of the public at large. In addition to the recommendations with respect to the Revenue Administration summarized above (pp. ), some additional recommenda- tions are summarized below: 1.- One of the best means of maintainin; honesty and impartiality in the Revenue Administration is to pay adequate salaries (which also will attract high calibre personnel), Another is to have an independent inspection service. The rudiments of such an inspection service exist in the Examination Division (Sala de Glosa) of the Vecounting Office.. Its efficiency could be increased not only by an expansion in its staff,. but also by modernization of its procedures. 2. Local tax administrators must have at their disposal an up- to-date collection of tax laws, regulations and procedure manuals. There should be no doubt in their minds as to whether a given tax is still,on the books--a situation which we found to exist even among the top officials at the :1nistry itself. likewise, the taxpayer must be in a position to ascertain for what taxes he is liable, and at what rates. He should be able to obtain clear, concise and authoritative infcrmation on all tax laws and regulations. We therefore recommend that the Nicaraguan tax laws be reviewed as soon as possible.. Those taxes not actuallyrepealed should be repealed promptly. All other tax laws should be collected in a tax manual, together with the relevant amendments and regulations.. As tax laws are usually couched in involved legal phraseology, we recommend that a simple, non-technical, descriptive compilation of tax laws be prepared and made available free to taxpayers. The ordinary taxpayer should be able to determine his tax liabilities without engaging the services of a lawyer and without making a trip to 7Hanagua or even to the nearest Rentas Office. 3. Taxpayers should be adequately protected against arbitrariness or even incompetence of officials. On the other hand, the government - 59 - should be in a position to punish willful violators of tax laws,. We believe that the establishment of a tax court of appeals, whose decisions should be widely publicized (and collected for reference), will provide the ordinary taxpayer with protection and the government with a convenient means of enforcing compliance; it also will be of great educational value. In a country where only a negligible minority of the population had ever had direct contacts with officials of the tax administration, where tax consciousness is low, and where voluntary compliance with tax laws at best is spotty, a well-functioning tax court will perform the role not only of a policeman, but of an educator (for both taxpayer and tax administrator) as well. Members of the tax court should be appointed for long terms and all possible guarantees should be taken to select competent judges and to protect their independence while in office. 4. Fraud and evasion are not discovered simply by verifying whether figures add up. Use of collateral information, and of average ratios (such as a multiple of the average rental value pf the taxpayers' dwelling, or net receipts as a pe4centage of gross receipts of various types of retail stores to estimate income, and average yield per acre to check income from farming) is valuable in auditing and assessnent. Lists of memberships of professional and trade organizations, as well as records of individuals who have secured various licenses and patents, should be used to check compliance with tax laws. 5. In setting up machinery for processinL; and auditing of income tax returns, and for billing and collecting the tax, some basic decisions must be made. The advantages of centralizinZ billing and collections in Managua, while decentralizing filing and auditing, must be considered. Adequate records for administering the carry-back provisions must be set up* 6. At the present time, revenue collectors (Administradores de Rentas) outside "Managua also perform the function of disbursing officers. While the amounts disbursed outside of ?-anagua are relatively small (according to the budget for 1951/52, 83 per cent of total government expenditures were to be disbursed in Managua), several disbursing officers should be appointed in the departments. (In some cases, one officer could handle an area covering several departments.) This separation between collection.and disbursing of government revenues would greatly simplify accounting and auditing. 7.Since checks are not widely used, and since there are no postal money orders or any other facilities for transferring funds, taxes are paid in most cases in cash at the collector's office. Taxpayers fre- quently have to travel to the departmental capital to pay their taxes, ard must stand in line to await their turn. In some cases, fiscal stamps have to be purchased in one place and cancelled in another. In view of the shortage of banking facilities in the country.(even the Port of Corinto, through which the bulk of the country's foreign trade passes, has no branch of the iNational Bank), the institution of a - 60 - limited postal checking system should be considePed. Tax payment coupons of various round denominations (say, 1, 5, 20, 100 and 500 cordobas) should be sold by all post offices. The coupons should be acceptable only in payment of taxes.. .lternatively, all taxes could be made payable in fiscal stamps, which would be sold by all post offices, -ith respect to the Gustoms Administration, it is obvious that an administration which controls half of the total tax revenue of the Nicaraguan government should be placed under the direct control and audit of the -..inistry of Finance. The present situation is unsound and should be terminated as soon as possible. 1. All revenues collected by the Customs Administration 3hould be covered into the general fund, after payment of interest and amortization on the Ethelburgia loan. 2. Pll expenditures of the Customs Administration should be subject to the same rules governing the budgeting, disbursement and audit of all other government departments. 3. The customs tariff and the procedures followed in assessing values of imports and exports should be reviewed and amended where necessary., 4. The Annual Report (Mlemoria) of the Customs Administration should be reorganized to provide more information that would be useful for analysing the impact of foreign trade (and of duties and taxes falling upon it) on the domestic economy, - 61 - PART IIt THE PRPARATION, ORGANIZATIOT AND EXEUTITI OF THE .ATIO_IAL PUDGET The dinistry of Finance is organized to Amdinister the present tax system, and to disburse government funds. it is not adequately equipped to assess the fiscal needs of the country, to prepare a budget, to appraise the impact of various types of taxation on business an0. the econonic develop- ment of the country, to study the incidence of taxation or to estimate prop- erly government revenues and expenditwres. It does not actually formulate any long-range fiscal policy to provide the government with adequate fiscal resources to meet over-all goals of government po.icy. The -inistry of Finance is little more than a combined collection and disbursing office performing routine functions, with a minimun of accounting controls, a minimum of publicity of its operations and a minum of safeguards against arbitrary administrative decisions, It has no organs of policy for- mation or fiscal planiing. There is no systematic analysis of operating results and practically no inter.-departmental coordination in fiscal matters. The inistry has no statistical office or research department4 The '.Inister has no staff to assist him, not even a secretariat. Too much of the office time of the :inister of Finance is spent in siga U g checks and in receiving private citizens who come to discuss vaPious matters, not always directly related to taxation or fiscal administration. ] Stimates of the time which the inister spenda si&ning checks or talking with visitors, obtained from the present and two former linisters of Finance, range from 60 to 80 per cent of total office hours. Needless to say, unless the Minister is relieved of the duty of signing checks for all, even the smallest, government expenditures and unless dis cussion of imnor complaints and personal probleas is delegated to a staff officer, one of the most important adninistrctions will remain under the direction of an official whose time schedule does not leave him any time for even a cursory examnation of policy and administrative problems. Ile also have the impression that there is a tendency not to delegate responsibilities to the heads: of the various divisions The minister mal4es final decisions on matters which should be settled on a much lower level of responsibility. Thus the minister personally reviews complains of over- assessment and makes the ultImte decision on the amount of assessment. The present staff of the 11inistry proper, including auditors and examiners attached to various other ministries or autonomous bodies or traveling in the dppartments, numbers less than 90 (excluding typists, porters and guarda)* This small number even includes officials of the purchasing office (handling supplies for practiqally all government depart- ments) and the philatelic agency, No specific educational qualifications seem to be required for any position in the Idnistry, Ther- is no training progran for the personnel of the 1inistry except for sone courses for accountants for which a total annual budetary appropriation of 32,400 cordobas (less than "5,0C0), one- third for salaries of instructors and two-thirds for student allowances, is made. -62 - While being poorly organized and inadequately staffed even to fulfill the functions of a routine financial department of a minor a&inistrative unit, the iinistry of Finance tries to combine the functions of a Revenue Administration, of a General Accounting Office, of a Government Purchasing Office and of a Bureau of the Budget. Ueedless to say,.it does not ade- quately fulfill any of them. While sorle of its leading officials are aware of the exipting shortcomings, we could find very few instances where positive steps have been taken to remedy the most unsatisfactory situations.. Ieedless to say, no real progress either in the preparation and control of the budget, or in fiscal administration can be accomplished without a drastic reorganization of the i4istry, Everything relating to fiscal planning and analysis and the formulation of long-range fiscal policy must be newly created. It is necessary for the Government to understand to the fullest extent the importance of fiscal planning in relation to general economic ,larning and :evelopment. 1. PreDaration of the Budret. The preparation of a budget and a clear and consistent presentation of its main features is a major reaponsibility of the executive branch of government., At the present time, the preparation of the budget is the sole responsibility of the I linister of Finance, The budget is prepared by the Hinister of Finance with the assistance of the President of the A-,counting Office (Tribunal de Cuentas), the Director of Revenue (Director de Ingresos) and the chief administrative officer (Official riajor) of the 'i-nistry of Finance. In estimating revenue, the advice of the Collector of C-2toms is secured. Beyond securing advice from the senior officials of the ministry, the whole burden of preparing the budget rests on the minister himself. Revenue eatigates reflect the personal judgment of the !Mnister of Finance, based on past experience and unsupported by any formal analysis of fiscal or other data. The Iinister estimates revenue for the coming fiscal year, He reviews and reconciles expenditure requirements of the various departments, submitted by their heads. The budgets of the individual ministries are submitted separately to the President and are reviewed by him, The budget is then presented to Congress by the inister of Finances. The budget is examined by the finance commnittees of the Chamber and of the Senate. In recent years, the budget was submitted so late that only a few days remained before the beginning of the fiscal year.. The members of Congress not only had no opportunity to studir the broad features and implications of the budget, but even lacked sufficient time to detect misprints. The short reports of the two chambers make no effort to evalu- ate the budget in terms of any specific programs or the general needs of the country, The review is purely perfunctory, indeed. Thus, for instance, the Senate Committee on Finance and Public Debt in reviewing the 1951/2 budget, the largest ever submitted, made one single change, namely to split a subsidy of 1,000 cordobas between two churches instead assigning it to the restoration of one church, The changes proposed by the corresponding committee of the lower chamber were somewhat more numerous, but not more significant. - 63 - The budgetary powers of Congress, as defined by the Constitution, are limited by the provision that only the Executive can propose an increase in the total amount of expenditures or make changes in estimated revenue, Congress cannot make any change in "fixed expenditures" (such as contrac- tual obligations - public debt service or contributions to international organizations), but it can transfer funds between "variable expenditures", provided no increase in total budgetary appropriations beyond the figure submitted by the executive results. Oncq the budget is approved, there is no agency or official (except the M1inister of Finance himself) to survey the execution of the budget. True, a section of the Tribunal de Cuentas (Sala de Contraloria) verifies that every check is prepared in conformity with the credits available for the given purpose, and that payments made are charged against the appropriate credits. But there the controls end. Fiscal pronrams are not reviewed during the year in the light of changing circumstances or actual collection experience, A-opropriations voted are disbursed to the extent that funds are available (with salary payments having an absolute priority). The only flexibility seems to consist in generous underestimation of revenue, the willingness to reduce payments for public debt service below budgetary appropriations, and to ask for supplemental qppropriations. As a matter of fact, in each year since the end of the war (with the exception of l947/8) an extraordinary budget was voted; in 1949/50 it took the form of a loan from the National Bank, without expenditures made from it being formalized as an extraordinary budget (see Table.5), The supplemental credits of recent years were voted without any detail or breakdown. The following example involving a supplemental credit of 9,000,000 cordobas (or nearly 15 per cent of the original appropriation for 1948/9) is typical: "The extraordinary supplementary credit referred to in the preceding Article will be used to meet the pending extraordinary expenditures resulting from the further progress in completing public works and for meeting of other expenditures which are indispensable, -o cover future costs of the said needs and to pay any debts which the government should incur for emergency expenditures in cases when budgetary credits are not available to meet the said expenditures, or when budgetary approp- riations are insufficient to meet such expenditures." (Gaceta, April 19, 1949, p. 755). Estimates of government revenue are extremely uncertain, with a clear tendency towards underestimatingo Governm=ent receipts during the six fiscal years 1944/45 to 1949/50 (excluding autonomous bodies ana services) have each year exceeded budget estimates by 20 to 43 per cent. This was, of course, partly due to the general inflationary developments during the period under review, and also to the increase in revenues due to intro- duction of new taxes or increases in rates. Nevertheless, it is obvious that if the budget presented to and approved by Congress is to be realistic projection of governmental fiscal activities during the coming year, esti- mates of the fiscal resources (as well as of expenditures) have to be placed on firmer ground. Te table below compares for the last few years actual receipts with budget estimates. -64 - Table 5 Ordinary and Extraordinary Budgeted Exoenditures Fiscal Years 1944/5 - 1950/1 (millions of cordobas) 1 5 1945/6 9A6A 1547/ 1 1 1950/ Ordinary budget 38.5 51.3 56.2 52.1 62.8 54.5 66.1 Extraordinary budget 3,0 3.0 14.0 - 9,0 6.41/ 2.7 Total 41.5 54.3 70.2 52.2 71.8 60.9 68.8 Considered not as an "extraordinary budgetn, but as a loan (prestamo) from the Ntional Bank. - 65 - Table 6 Estimated.-and Actual Government Revenuel Estimated Actual Actual as a percentage (millions of cordobas) of estimated 1944/5 29.9 42.8 143 1945/6 40.0 50.5 126 1946/1 47.6 58.4 123 1947/8 52.7 63.1 120 1948/9 56.7 68,8 121 1949/50 51.4 64.0 124 1950/1 63.7 83.0 130 1. Current revenue only. Excluding reimbursements, loans and estimated surplus from the previous fiscal year. - 66 - Similarly, budget estimates of government expenditures during the last seven years have been consistently far below actual expenditures, even after allowance for supplementary (extraordinary) budgets. Indeed, actual expen- ditures exceeded ordinary budgetary appropriations in each year except the last; they even exceeded total (including supplementary) appropriations in each year except 1946/47. In that year, however, the ordinary budget was increased by 25 per cent, less than four months before the end of the fiscal year. Actual expenditures in 1946/47 fell only 1.6 million short of appropriations. This is equivalent to only about one-tenth of the sup- plemented appropriation which, apparently, could not be spent quickly enough. In the following year, the only one without a supplementary budget in the period covered, nearly 19 million cordobas (or 36 per cent) more were spent than authorized in the budget, Under such circumstances, the budget, as enacted, does not give even an approximate guidance to the expected fiscal performance during the coming year. 2. Organization of the Budget In its present form, the budget of Nicaragua is essentially a list of salaries whi h individual government offices carry, grouped by departments and bureaus. All jobs, including minor (presumably part-time) positions carrying an annual salary of as little as C720.00 (a little over .100) are listed individually. Non-salary expenditures are in some cases given in superabundant detail, while in other cases relatively large items of expenditures, mainly for the purchase of goods and services, are not broken down. There seems to be no uniform principle governing the inclusion of details on non-salary expenditures. There is in the budget no breakdown of total expenditures between salary, capital, and other categories of expenditures. It is impossible to appraise from the budget as now presented either the actual cost of the various functions of government, or the profitability of the various quasi- business activities of the government. There is no summary of expenditures for specific programs. In spite of its bulk and of the detail given, the budget is of ex- tremely limited analytical value, In recent years, at least, it did not include any general statements on the objectives of government fiscal activities (except to balance the budget) or any review of the recent fiscal activities of the governmej,t. It is submitted without any substan- tial discussion of the economic outlook for the fiscal year tc which it applies, or of the results of the year which is drawing to an end. In 1949/50 and 1950/51, for instance, the Finance Ministers' messages to Con-ress accompanying the budgets were the only explanatory statements offered; they were limited to four pages of large print. This year's message of 4- pages -7as not much more illuminating, 1. SQ e Jobs held concurrently by the same individuals are listed separately. No indication is given that such functions performed under one heading are normally performed by another official, who thus draws a supple- mental salary. Thus, the tax receiver (Adinistrator de Rentas) is also a member (vocal) of the local tax assessment board (junta de investigacion y detalle) and as such draws an additional salary. -67'- The summary tables attached to the Mi.nister's riessage show merely a comparison, for each department, with the proposed budget of the previous year, rather than a compFrison with either the actual receipts and exnendi- tures of the last fiscal year, for which accounts were closed, or with the preliminary estimates of the actual results of the current years. Obviously, the organization and presentation of the budget is one of the principal areas where important progress can be rapidly achieved.2 The national budget should provide a complete and clear picture of the fiscal activities of the government, as follows: 1. It should ;ive to the legislator and to the interested citizen an estimate of the cost of both administering the country and developing its economic potentialities, and a comparison with the actual expenditures in the preceding year. 2. It must be complete and include all revenues, whatever their source and ultimate use, including assigned and shared revenues (transferred to autonomous bodies and special funds, now called "rentas pignoradas"). It should, however, include on the income side only income that is actually available to the government and exclude gross receipts resulting from the various quasi-business activities offset by corresponding expenditures, 3. Estinates of all receipts as well as expenditures must be realis- tiq4 Adequate provision for contingencies that are likely to arise should be made, 4. Any difference between projected revenue and expenditures should be reconciled by showing the disposition of the surplus or the way in which it is proposed to meet the deficit, if any. 5. A reclassification of receipts and expenditures is necessary to achieve budgetary clarity. Receipts should be grouped by type of taxation (and other types of income - by their fiscal and economic character), rather than by the collecting agency.3 For administrative convenience, it might be expedient to group expen- ditures by departments which actually disburse the funds. In such a case, a summary by function or purpose should be provided as an appendixi It should be feasible, however, to break down within each.government depart- ment expenditures between those for general administration and for con- struotion, If so, capital expenditures should be broken down between those for economic development and those which serve other purposes (such as con- struction of government buildings, barracks, monuments, etcO.) 2. The 3,951/52 budget shows some significant improvements over earlier years. Since -e are concerned with further improvements, changes in the organization of the budget.which have been made in recent years are not reviewed here. Nearly all of them have improved the budgetary document and were important steps in the right directioni 3. A table by collecting agency might be appended, if this is deemed useful for administrative or analytical purposes (for instance, to compare costs of collection,)A - 68 - In order to meet the objectives outlined, it is proposed: 1. To make the classification of expenditures within each depart- ment uniform and consistent, All expenditures within each department should be grouped under the following headings: A. Current administrative expenditures, broken down between: a. salaries b. supplies and maintenance, and a. other expenditures B. Capital expenditures 2. To include in the budget all taxes levied by the national govern- ment, including those subsequently transferred to autonomous entities or special funds ("rentas pignoradas"), in order to show the entire national tax burden borne by the country. The principle of budgetary unity is not observed when segregated funds are operated outside the budget. To the extent that such special funds (and treasuries of autonomous bodies) re- ceive revenue from the general fund, this revenue and the corresponding transfer payments should be included in the budget. Revenue transferred to autonomous funds has been excluded from the general budget only in the last two budgets. 3. To include in the budget only the t, rather than the gross amount of government services and monopolies, in accordance with practices in most other countries. This represents a change from the present pre- sentation which, however, is not consistent. The budSet now includes the net income only of government enterprises and institutions (empresas e instituciones nacionales), but the g= income from the match monopoly and from the communications services. In the case of government services which may be classified as quasi- business activities (which in most countries are undertaken by private enterprises rather than by government agencies), receipts represent charges for specific services rather than taxes to meet the cost of general,government. Similarly, expenditures for the purchase of items for resale by fiscal monopolies or government stores and the correspond- ing receipts from sales are now included in the budget, Only the profits (or deficits) or suoh quasi-business activities of government should be included in the general budget. Ia order to appraise the profitability of these services and their efficiency of operation, gross operations should be detailed in separate appended budgets. This change will follow the precedent set several years ago when receipts and expenditures of government-owned institutions ("gastos indirectoe") such as those of the National Bank and of the Port of Corinto, were eliminated from the national budget, leaving in it only profits of these institutions available to the general fund. - 69 - There might be a constitutional difficulty to overcome, as, accord- ing to Articles 254 and 261 of the Constitution, only expenlitures specifically provided for in the budget can be made legally. This difficulty can be solved either by making the separate budgets of government services and monopolies an integral part of the budgetary document (as appended budgets) or by deducting expenditures from gross revenue (on the revenue side of the budget) in order to show net revenue, 4. To exclude fictitious items, such as dividends "paid in kind" by the government-owned railroad. The diviVends paid by the government- owned Forrocar1l del Pacifico de Nicaragua represents the imputed value of services rendered by the railroad.5 The amount of this "revenue" is determined by the size of the government freight and fare payments to the railroad which these livir.'nndsin are supposed to mat.,h. This imputed item inflates the income and expenditure sides of the budget by an identical amount (thus cancelling out). 5. To group all expenditures for the Nationial Guard (Guardia SNacional) under Defens~e (Ra:no de Gurra, Marina y Aviacion), In the last budget, some military units, such as the M2nal;ua city police (policia urbana in IGobernacionP, Cap. IX and X) and financial guards (resguardas de hacienda in "Hacienda", Cap. XIV), which, we understand, are not even under the orders of the Minister of Finance, were carried in the budgets of other ministeries. Those two items alone are equal to one-third of the appropriations of the D fense Department. It is recognized that certain services which are nominally under national guard status (such as the Custo:,.s A-ldinistration and the Radio Nacional) perform functions that are not pri,arily military. All Gua:'l units, however, which are not clearly performing civilian functions, should be carried in the military budget. 6. To show the public debt transactions (as distinct from payment of interest on the public debt) as a balancing item and not under Finance (Hacienda), even though the latter department is responsible for the management of the public debt. Showing of the budgetary surplus as a balancing item represents a radical departure from the present practice which, however, is pre- scribed by the Conatitution. Indeed, Article 260 specifies that "The surplus remaining after the closing of accounts of a fiscal year should be incorporated as revenue in the budget of the following year." Conversely, "when a fiscal year results in a deficit, this Ieficit should appear as an item of expenditure in the budget of the following year." 5. The railroad transports gover=mient passengers end freight at half rates. The other 50 per cent are supposed to represent payment of dividends in kind. - 70 & Taking advantage of this provision, in recent years estimated budgetary receipts have included under the title of "fiscal reserves" ("reservas fis- cales"), allowances for Treasury cash balances expected to be available (at the National Bank and in the Custois Administration) at the beginning of the year. As a matter of fact, this item was placed at the head of the estimate of Government revenue ("Title In). In the current year (1951/52) budget, this title alone amounted to 12,550,000 cordobas, or to more than 17 per cent of estimated total gross government revenues (which was expected to fall more than 4 million cordobas short of estimated expenditures), It is generally difficult to estimate several months ahead the level of excess Treasury balances at the end of the current fiscal year. In 1950/51, for instance, when "fiscal reserves" of the general fund were estimated at two million cordobas and those of the Customs Administration at cne million, the actual receipts under this title were exactly zero (according to the liquidacion supplied by the Tribunal de Cuentas)* It appears, therefore, entirely unrealistic to include in the budget any surpluses from the immediately preceding year, The full amount of the expected deficit for the given budget year should be shown, The budget for a given year should show the expected net result of fiscal operations during that period alone, not the accumulated fiscal results of that year and all preced- ing years. Ways should be explored to make this change consistent with con- stitutional requirements. The proposed changes in the organization and presentation of the national budget can be best shown by means of a summary table corresponding to the one placed at the head of the first part of the 1951/52 budget (Balance del Pre- supuesto de Egresos e Ingresos de la Republica de icaragua 1951/52) and a set of several appended budgets and appendix tables. Needless to say, these tables are bare outlines. Whenever figures are inserted, they are used for illustrative purposes only. Also, it is obvious that in many cases several alternative presentations which have considerable merit are possible; such alternatives and some additional analytical tables suggested above are not discussed here in order to keep the report to manageable size. Ia most cases, breakdowns are given for illustrative purposes only. The attached tables, therefore,should not be considered either comprehensive or exhaustive. The entire tabular material attached to this section is intended merely to facili- tate discussion of specific points. In anticipation of the prompt enactment of the legislation creating the Listituto de Fomento, these tables show how its operations could be integrated with the general budget. The following table is the over-all summary of the budget. It should be accompanied by a comparison, item by item, of the proposed appropriations and anticipated revenues with the actual fiscal results of the last year for which the accounts are closed and with preliminary estmates for the current year. 6. Obviously, the Treasury cash balance cannot be drawn down to zero at the end of the fiscal year. We, therefore, assume that the amount shown in Title I of the budget represented the estimated ex,ess over the normal level of Treasury working balances. - 71 WAIONAL BUDGET FOR THE FISCAL IAR 19. Expenditures Receipts 1. Administrative Expenditures li Taxes a. Legislative 5 a. Direct taxes b. Executive1 53 1. Income taxes c. Judicial 2 2. Property taxes Sub-total 60 3. Property transfer and inheritance taxes 24 Capital Expenditures 4. Other direct taxes Sub-total 30 a. Develop-ent2/ 9 b. OtherJ 1 b. Indirect taxes Sub,total 10 1. Import duties and taxes 2. Export duties and taxes 3. Transfer payments to 3. Excise taxes autonomous Bodies-/ 20 4. Fiscal stamps and paper 5. Licenses and patents 4, Surplus 5 6. Other indirect taxes Sub-total 50 Total Government Expenditures 95 2. Revenue of the Communications Service (see appended budget).4 3 Public Debt Transactions: Retirement (+) or in, 3. Revenue from si-business crease (-) activities ee appended budget II)Y' 4 a. Internal -5 b. External +.10 4. Dividends of Government enter- Sub-total 5 prises and institutio-a (see appended budget III)! 3 Change in Treasury balance 0 5. Other regular income 1 Total 100 6, Reimbursements 2 a. From abroad b. Domestic - Total 100 1/ Expenditures by departments should be shown separately under this heading; interest on public debt to be included under Ministry of Finance, 2/'Payments to the Instituto de Fomento are included under 4. For total development expenditures, see appendix table 5. NTow called earmarked revenue (rentas pignoradas).. This item may be negative and appears under expenditures in the form of a subsidy. - 72 - 1. .On the revenue side, the proposed budget table includes all assigned and shared taxes (ransferred revenue,- rentas transferidas - seems to be a better term than assigned revenue - rentas pignoradas). TNis follows the earlier Nicaraguan practice, but is in contrast to the most recent budgets (since 1950/51) in which such taxes are excluded from the budget. No meaning- ful analysis of the tax burden and of its composition is possible unless all taxes levied by the national government are included under revenue, Assigned or shared taxes are shown under expenditure as "transfer payments" (item 3), All tax collections (including import and export duties) are grouped by type under two subheadings, direct and indirect taxes. The following three items represent the net contribution of the Communications Department (item 2), of government monopolies and quasi-business activities (item 3), and of government-owned enterprises, such as the Fational Bank (item 4). The Qross transactions of the three sources of revenue listed under items 2, 3 and 4 are given in the appended budgets I, II and III which are discussed below and which should form an integral part of the budgetary document. All other regular government income (such as fees, fines, proceeds of the sales of government property, etc.) is lumped together in item 5. How- ever, it might not be possible in all cases to segregate fines from taxes to which they relate. The word " regular"l is used to denote the 0dntrast to non-recurrent reimbursements shown in the following item. Actually, item 5 may include some items that are not current (or recurrent).- if the amounts involved are substantial, it might be desirable to create a separate heading for such items, Also, if income from the sale or lease of government land becomes important, such revenue should be shown separately. The last item, reimbursements, is self-explanatory; it incluqes mainly: a. those from the U.S. Government for the construction of the Pan- American Highway, and other reimbursements received from abroad (for instance, from international organizations) and b. those received by the highway department for work performed for private citizens and similar domestic reimbursements. 2. On the expenditure side, the proposed table.includes the legislative the judicial, and all departments of the executive branch of government, Salary, maintenance and all other current expenditures (including interest on the public debt to be shown, as a separate item, under the Minz'stry of Finance) should be included under thi.s heading. All construction expendi- tures should be grouped under 2, broken down between development and other capital expenditures (such as expenditures for military installatfons, monuments, etc.) 3. The balancing item of the budget might be positive (uhen there is a surplus) or negative (when there is a deficit). A minimum of information on the disposition of the surplus (to retire public debt or to add to the Treasury cash balance) should be given. Conversely, a deficit will be reflected by an increase in the public debt and/or a decrease in the Treasury balance. In the summary table, it might be sufficient to show these changes under two headings only, domestic and foreign debt. More detail should be provided in appendix tables (see below, appendix tables 1 and 6). -73 - It is believed that the recommended rearrangement of the surmary table will greatly increase the value of the budget for the legislator and the administrator, as well as for all interested citizens.? The usefulness of the budgetary document itself and the analysis of budgetary appropriations would also be facilitated if recurrent items were numbered consistently.8 At the present time, chapter (ca-pitulo) headings are not consistent from year to year, so that comparisons of appropriations are difficult to make. The various appended budgets and appendix tables are arranged in a logical order. The a,ended budgets show the derivation of net revenue on the income side of the budget (items 2 through 4). The first four appendix tables are necessary additions to the budgetary document. The last of them (No. 4) contains, in a different form, information already supplied in recent budgets. Appendixes 5 and 6 are analytical. Apended budget I is the budget of the Communications Service (xhich now is included gross). The present breakdown of expenditures between com- munications and 1'Radio Nacional" should be expanded to list separately the postal, telegraph and telephone services, as was already done for receipts in the 1951/52 budget.,9 Actually, the budget is likely to show not a profit, but a deficit (to be met from the general fund), ,ainly because many services are supplied to various government departments without charge. Unless an explicit charge is made for the government use of the radio, telephone and telegraph services, it will not be possible to ascertain whether the service's supplied to the public at large are profitable, nor will it be possible to estimate the amount of the implicit subsidy. 7, We are not making any suggestions as to the reduction of the bulk of the budget document. At the present time, the Fic2raguan budget is essen- tially a salary budget. As there is no civil service and no established table of organization of the various departments and services, the bud- getary document apparently also serves the purpose of establishing, for the coming year at least, the organizational structure of ad:Ainistration. 8. If a breakdown of an item becomes necessary in subsequent year., the digit system of numbering could be used. For instance, chapter 2 *-ould be sub-divided into 2.1 and 2.2, and the sum of the two would be comparable to the old chapter 2, Whon a chapter is eliminated, the numbering of the following chapters should not be changed, in order to maintain comparability. The advantage of using arabic rather than roman numerals for chapters is obvious (2.1 is easier to read than II/I). 9. The sale of stamps to finance the construction of the National Stadium does not represent postal receipts and should not be so listed, as was done in the 1951/52 budget (p.ge 511). - 74- AEended budget is the corresponding presentation of the activities of the match monopoly (Estanco de Fosforos) and of other quasi-business activities of the government. It might be desirable to include here also the sale of building materials by the Highway Department, now carried under miscellaneous reimbursements (reintegros diversos) and the sale of medicines and of various supplies. These.receipts are now shown separately, but the corresponding expenditures are difficult to segregate from the various chapters of the budget. The profitability of these various quasi-business activities cannot be ascertained from the budget (and the closed accounts) as now submitted, However, even if all goods produced or purchased and resold by the government are covered by this appendis:, the balance between receipts and expenditure will not represent the net profit (or loss) from such opera- tions, unless: 1, salaries of government employees involved in these activities and related expenses, and 2. changes in inventories of such goods held by the governmrent are taken into account. Ideally, the presentation of the business activities of the government should include those items, and the setting-up of the accounting records necessary to achieve this goal should be initiated. In the meantime, the presentation of current cash receipts and expenditures during the fiscal year will add to the clarity of the budget, Appended budget III should consist of a series of income statements of the various government-owned enterprises. At the present time, both projected income and expenditures of "Empresas e Inqtituciones Nacionales" are given in the budget document, but not in the form of a budget. They should be regrouped to show, for each enterprise or institution, the anticipated net result of each year's operations. - 75 - Appendix 1. A public debt statement should be an integral part of any national budget, The proposed form distinguishes, for obvious reasons, between domestic and foreign loans. It might be desirable to show, separately, the short term indebtedness to the National Banks, rather than to lump it together with the funded debti Any guaranteed debt of government-owned institutions should be shown as a memorandum item. As long as the Customs Administration is not fully integrated with the Ministry of Finance, it might be useful to show separately the debt managed by it. Apoendix 2. The anticipated net result of the fiscal year is reflected in this appendix. The general fund balance at the beginning and at the end of the fiscal year should be broken down, as indicated. The budgetary surplus (or deficit) represents the link between the balance at the beginning and at the end of the year. Appendix 3. Again, as long as the cordoba is not freely convertible, it is useful to summarize from the budgets of the various departments all expen- ditures payable in dollars, such as service on foreign loans, contributions to international organizations, etc. Appendix 4. Separate budgets should be given for all special funds and autonomous bodies which receive transfers from the general fund (such as the Tourist Office, the Sports Commission, etc.), It might be useful to add a summary table showing the combined budget of all such entities operating outside the general fund. Appendix 5. It is desirable to summarize all development e-penditures, irrespective of the source of financing. In this appendix, expenditures of the Instituto de Fomento are added to construction expenditures financed directly from the general fund. The expenditures of the Instituto de Fomento should be broken down to show what part was met through transfers from the general fund. Appendix 6. It is desirable to show the entire fiscal burden of the country, including national as well as municipal taxes. In order to avoid double counting, taxes collected by the municipalities and transferred to the national government (quotas para administracion judicial and controlaria municipal) should be deducted from the national government revenue. Although government revenues are reported net of discounts (honorarios) granted to tax collectors, these should be added in computing the total amount of taxes fees and fines paid by the taxpayers, - 76 . Appended Budgets I. Communications Service II. Quasi-business activities III. Government enterprises and institutions Appendix Tables 1. Public debt 2. Treasury cash balance 3. Expenditures payable in foreign exchange 4. Autonomous bodies (a separate income statement for each spec-fal fund or entity)!/ 5. Development expenditures 6, Total fiscal burden / Expenditures of Government enterprses and institutions are shown in the 1951/2 budget on pp. 445-505 and their income under title V of the general budget (pp. 516-518). T,e suggested presentation would bring together revenues and expenditures of each entity and thus show its surplus or deficit, -77-" Appended Budget I Commications Service Expenditures 1. Communications: 1. -Income from fees charged1 a. Current expenditures (salaries, 2. Other income2 maintenance and miscellaneous). b. Construction c. Contractual payments (international airmail, etc.) 2. National Radio 3. S-us Total Total 1. Excluding semi-postal staps for the construction of the stadiLum. 2. Now included in "miscellaneous revenue" (such as sale of directories). - 78 - Appended Budget II quasi-business activities1 Expenditures Receipts 1. Matches a. Purchase of matches a. Receipts of the match monopoly b. Transportation and distribution costs b. Other receipts Sub-total 2. Other articles 3. Surplus Total Total 1. The receipts of the Highway Department for work performed for private individuals may also be included here. .- 79 - Appended Budget III National Bank of Nicaragual Expenditures Receipts Interest paid Discounts General exoenses Exchange Paid to the Government of Commissions Nicaragua Other income Retained earnings 10 per cent share in the profits of the C.M,U.2 Total Total 1. This budget is derived from the 1951/2 budget (Title XXIV for expenditures and Chapter VI for receipts.) Similar budgets should be included for all government-ouned enterprises and institutions. 2. Compania Hercantil de Ultramar - the foreign trade subsidiary of the National Bank, S Appendix 1 Public Debt1 Domestic Foreign Total 1. Public debt of the beginning of the year "2. :tc-mt paid L.aortUation 4. New borrowing 5, Public debt at the end of the year (1 - - 4) Memorandum: Debt of autoonous bodies guaranteed by the government 1. As long as the Cnsto-.as Ac::i-istration is not fully integrated with the Ministry of Finance, a breakdown should show separately the public debt managed by the Customs Administration, - 81 - Appendix 2 Treasury Cash Balance 1. Balance at the beginning of the year t i At the National Bank b. At the Customs Administration c. At the local Revenue Offices d. At the fiscal agencies Sub-total 2. Outstanding checks 3. Net balance 4. Addition to cash balancel 5. Balance at end of the year (3 41. 4) Memorandum: Balance in foreign exchange at beginning and end of fiscal year. 1. Budget aurplus minus change in public debt outstanding. - 82 - A-mendix 3 Expenditures -payable in dollars 1. Diplomatic and Consular Services 2. Contributions to international organizations . Inernational conferences . .ommunications service (see appended budget I) 5o Foreign loans: interest and amortization 6. Other (break down if item is large) TOTAL - 83 - Appendix 4 National Social Assistance, BOMA/ Exni=ditures 1. Subsidies paid 1. Transfers from general budget . Sons thetio 2. Other 3. Administrative expensea 4. Reserves TOTAL TOTAL /Now apperded to the budget (title XXT for expenditures and tttle V, chapter III for recei-pt); similar budgets should be appended for all autonomous bodies receiving assigned taxes or direct subsidies from the geaeral budget. A&Dendix 5 Development expenditures 1 C Oonstruction (included in the general budget) 2. Payments of all types from the general budget to the Institute de ?Omento Development expenditures of the Instituto de Fomento other than those met from funds assigned from the general fund TOTAL 0 Avoendix 6 Total Fiscal Burden 1. Tax revenue of the national governmentl 2 T Tx rovenue of municipalities Sub-total 3. Discounts to tax collectors Total 1. Less transfers to national government for meeting the costs o' local justices and of auditing of municipal treasuries. 0 - 86 - 3. Lxecution of the Budget Proper execution of a budget requires not only remaining within counds of appropriations made, but also spending funds for the purposes for .ich they have been appropriated, Otherwise, some appropriations can be rightly characterized as having been budgeted for window dressing only. 1T.ere is in Nicaragua a persistent tendency not only to exceed bud- -t,,ry approi'iations, but also to make expenditures for purposes not provided :.r in the budget and at the same time to curtail expenditures for which ap- priations were made. The year 1949/50, when a serious effort was made to balance the budgets may serve to illustrate the point. Of the total cash expenditure of 62.3 million cordobas (excluding the imputed payment to the railroad, amounting to 14,7 million), only 50.7. represented funds spent as appropriated in that Zear. Another 9,3 millions (or nearly 15 percent of total cash expenditures) represented hold-over ap- * propriations from previous years, while 1.6 million represented expenditures from funds transferred from one title to another, at the discretion of the Minister of Finance.- (The.remaining 700,000 cordobas represented miscellaneous transactions.) Similar information for the fiscal years 1944/45 through 1950/51 is given in table 7 below. A more detailed breakdown would show that in most years only a minor part of the appropriations made for retirement of public debt was actually spent for this purpose. In any given year, the Minister of Finance can authorize, within a given department (Ramo), expenditures to be charged to any of the three fol- lowing accounts- I. Actual budgetary appropriations for the current year (under title and chapter under which such specific expenditure was authorized) 2. Appropriations transferred within the same department 3. Appropriations for a given department made in any of the previous years, but not actually spent (hold-overs)o Hold-over accounts obscure the actual fiscal results of thD current year. The handling of hold-over accounts is based on a provision of the "Dis- positions on the execution and liquidation of the budget for .,11 ("Dispos- iciones que regulan Ja ejecucion y liquidacion del Presupuesto General de Agresos e Ingresos de 19...") appended as "part III" to budgets of recent years. It provides that every month all unspent funds (all salary and most other appropriations being oi a monthly basis) should be transferred to a "remainder account" (Remanentes de Administracion Publica), This cumulative account is at the "exclusive disposal of the Minister of Finance, to be used Table 7 GOVERNMENT EXPENDITURES Clasfied by type of appropriation,j.fisca1 years 1944/L5-1950/1 (Millions of cordobas) Category 196/L5 19h5/6 1946/h7 194L47/8 1968/49 1949/50 1950/51 Budgetary appro- priations (incl. extraordinary budgets) 39.0 49.7 51.2 49,4 57.0 50.7 60.8 2. Appropriations transferred 'within a department 444 6.7 8.7 10.8 15.4 1.6 1.9 3. Holdover appropria- tions from previous year 1. 0.5 - 6.7 6.3 93 5. 4. Automatic expendi- tures - - 4.7 - 0.4 - 2.h 5. Others 0.4 0.7 0.9 3.0 2.2 0.7 5.0 Sub-total 45.2 57.6 65,5 69.9 81*3 62,3 75.5 * o, Cnputed payments to - the railroad 1.9 2.3 3.1 1.3 1.5 1.7 1.0 Total 47.1 59,9 68.6 71.2 82.9 64.0 76.5 1/ Based on closed accounts (liquidacioneq). -88 - referably within each Department for payment of salaries for which no appro- ,riations have been made, and for urgent and indispensible expenditures," At the end of the year, all the balance in this account (after some inor adjustments) becomes (through an order of the Mvinister of Finance) a carry-over appropriation. It is added to the cumulated hold-over appropria- tions of previous years and becomes available for expenditure in the next fiscal year (in the form of an account "Remanentes de la Adinistracion Pub- lica al Junio 30, 19..."). Since hold-over appropriations (which are not segregated by years in which they originate) never expire, substantial credits are usually avail- able in most departments against which expenditures not provided for in the budget for the current year can be charged. In recent years, budgetary deficits were covered by borrowing from the National Bank, Under the pretext that payments made from credits opened by the National Bank was not charged against regular revenue, they were not always included in accounts of the budgetary situation made to the public. Thus, a budgetary surplus appeared on the books, whereas actually it was more than offset by overdrafts at the National Bank which were either not publi- cized or not yet legalized by Congressional action. Expenditures for which no budgetary appropriations existed were made - compliance with the letter of the law seems always to have been nearly perfect - by means of "ministeriales." These are orders to pay which are not posted (as all other checks) on ledger cards sholing the credit balance for each title, chapter and item of the budget. "Ministeriales" were ised until recently. They ran into substantial sums and were silbsequently legalized by supplemental appropriations. In the meantime, neither the minister nor.the public knew the exact cash position of the Treasury, since occasionally a way was found of charging a Iinisterialk' against a specific credit voted several years ago and still open. A call to the National Bank to find out the amount pf the credit balance available seems to have been the only recourse open to the Minister. We are assured that the practice of "ministeriales," which until very recently made much of the current reporting on the budgetary position largely fictitious, has been practically discontinued; that all the outstand- ing "ministeriales" have been properly legalized and liquidated, and that currently I'ministeriales" are used only to make small, urgent expenditures, such as to advance travel funds to officials who have to leave immediately* The preparation of regular orders to pay ("ordens de pago) require so many bookkeeping entries; initials, and signatures that at least two days are re- quired for their preparation. lith the practical abolition of ministeriales, the Minister of Fin- ance is now in a better position to follow the cash position of the Treasury, The regular daily reporting by the National Bank to the Ministry of Finance - 89 b. cf Treasury cash balances is, however, a relatively recent innovation. Even at the present time, no consolidated daily statement of Treasury cash position is being prepared, since the pustoms Administration (which, it is recalledi collects nearly half of all government revenue) report its balances only -onthly.1/ ,.The individual ministeries have no budget officers (this function being perforned, among numerous other duties, by the Official Major) or ex- :ense accounting. The control of current expenditures is neither systematic nor uniform. 4hile we understand that improvements have been achieved along these lines, and that the individual departmentsnow keep up to date records of open credits available to them, the Ministry of Finance still frequently receives inquiries from other departments on the credit balance available under some given chapter or item., Occasionally, the Ministry of Finance re- ceives "orders to pay" (orden de pago) - request for payment with a check attached which, when properly initialed, checked and signed by the Mdinister of Finance, is forwarded to the payee) which have to be returned be-ause no * more credits are available under the tital against which the order is drawn. The department involved then tries to find another chapter to which the ex- pense could be charged or waits untj. the next month when its balance is re- plenished (since nearly all appropriations become available on a monthly basis). Occasionally, a department tries several times before it finds an open credit. 4. Recommendations The preparation of the budget is one of the most complicated and time-consuming responsibilities in the field of government finance. In many countries, this responsibility is delegated to an autonomous agency, either attached to the Ministry of Finance or responsible directly to the Executive.2/ In order to make the national budget a complete and comprehensive financial plan for the year, its preparation should be made the major, per- mament responsibility of a high government official, W4e recommend placing the preparation of the budget in the executive department and the appointment of a director of the budget to be responsible directly to the President. The Director of the Budget should be assisted by a technical staff of high professional competence. The Bureau of the Budget should cooperate closely with the National Economic Council in translating overall require- ments of national economic and development policy into appropriate fiscal measures, 1/ An analysis of Treasury cash flow (Mdovimiento de Caja) was inaugurated only this year (covering the entire fiscal year 1950/1, not current op- erations), but no reconciliation between Treasury cash balance at the end of the year and the surplus shown in the liquidacion has been attempted. 2/ The Bureau of the Budget of the United States, originally part of the Treasury Department, is now part of the Executive Office of the President, In some other countries, such as England, preparation of the Budget is a separate cabinet function. - 90 - In order.to make realistic estimates of probable revenue during a coming fiscal year, it is necessary to analyze scientifically the factors de- termining the yield of the principal sources of government revenue. It is, r1oreover, necessary to review systematically the differences between expected a_nd actual revenues during recent fiscal periods and to study the reasons for ich differences. Finally, as need arises, the probable effects on govern- :aEnt revenu of any tax legislation or changes in rates and tariffs under con- sideration c-ould be studied in the light of past experience. , Then preparing the expenditure side of the budget, the requests of the various departments for funds must be reviewe4 in relation to the general fiscal and development policy of the government, The budgetary requirements of the various government,departments must be scrutinized closely. The ef- ficiency of their operations must be appraised. kl,uch of the material needed for the development of improved pro- * cedures for the preparation of the budget has become available in recent years or is likely to become available before long. In a country like Nicaragua, where the national income, and$ consequently, government revenues depend to a large extent on the level of exports, the projecting of the volume and value of exports is an important first step in the preparation of the budget. Another more general basis for estimating budgetary receipts are projections of national income and of its composition. It is hoped that one of the achieve- ments of the Iission will be to lay the groundwork for setting up methods and machinery for obtaining such estimates promptly and regularly. The placing of the Bureau of the Budget outside the Ministry of Fin- ance and in the Executive Department has definite advantages in a country which is embarking on a comprehensive, long-range development program. It will permit the Minister of Finance to devote his entire energies to the re- organization of the ilnistry required by the recommended changes in the fiscal system;to the integration of the Customs Administration in the :Iinistry of Finance; to the management of the public debt; to development of an efficient system of auditing and inspection; to the supervision of the preparation of new, and codification of old,. tax legislation; to the institution of the needed personnel training program and to the modernization and mechanization of office procedures. The Bureau of the Budget, not being like the inistry of Finance one of the largest claimants on government revenue, will be in a better position to review impartially the appropriation.requests of the various departments and to resolve the conflicting claims. The Bureau of the Budget should be concerned not only with the coming year's budget but also with long-range fiscal problems. This will require close cooperation with the National Eaconomic Council (of which the Director of the Budget should become a member) and the various departments represented therein, with the Instituto de Fomento, and with the National Bank. It must also be determined how the Director of the Budget can best discharge his responsibilities for reviewing and controlling current expendi- tures with a view to adjusting them to changing economic conditions. This is - 91 a function separate and distinct from the accounting controls of the Tribupal de Cuentas. Close cooperation between the Bureau of the Budget and the Tri- bunal of Cuentas should be established, but the Bureau should obtain powers of review beyond those presently exercised by the Tribunal, The regular and continuous cooperation between the Bureau Df the -dget and the individual ministries should be through budget officers of these depart:ients. Such officers would have the following functions: 1. Assist the IMinister in the preparation of the departmental budget , 2. Control the execution of the departmental budget 3, Control the utilization of individual credits and open appropriation balances 4. Analyze fiscal needs of the department with respect to a. personnel b. maintenance c4' capital expenditures 5. Set standards of performance 6* Cooperate with'the Bureau of the Budget-in coordinating the Government fiscal activities Our recommendations with respect to the organization of the budget are discussed in detail in Section 2.' Those with respect to the execution of the budget are sumnarized below: 1. The Bureau of the Budget should obtain statutory powers to supervise disbursement of funds appropriated to assure that the intention of the exec- utive branch, as approved by the legislature) is actually carried out# 2f The closed accounts should be submitted in a form permitting ap- praisal of the overall results of the fiscal year. The I'liquidacion" now submitted to Congress contains two separate parts. One is a detailed breakdown of internal revenue (all customs receipts are given in a single figure), the other - a summary of expenditures by title and chapter, with some detail as to type of appropriations (ordinary or extra- ordinary, holdover appropriations, etci). However, the two parts of the liquidadion are not tied together, Without considerable rearrangement and analysis of data, it is not possible to determine the size of the surplus or deficit incurred in the given yearo Thus, the liquidacion of ordinary ex- penditures (gastos administrativos directos) for 19505/1 adds up to a total: of 71.5 million cordobasi Since total liquidated receipts amounted to 85.5 - 92 - million cqrdobas (excluding rentas pignoradas), the fiscal year seems to have resulted in a surplus of 14.0 million. Actually, an additional 1*6 million of non-legalized expenditures (expenditures made without congressional authoriza- tion, are, it is recalled, never included in budgetary expenditures) and 1.5 :illion of "other expenditures" were made. The actual surplus thus amounted to 10.9 million cordobas (a figure which does not appear in the liquidacion), .hile the increase in the Treasury cash balance amounted to 9.0 million cor- dooas, as 1.9 million were used for additional debt retirement. 3. The liquidacion should include a clear statement of the surplus and o. its disposition. If a deficit is incurred, detail should be given regard- ing the way in which it was met. The liquidacion should be accompanied by a statement on the public debt, and on the Treasury cash balance (corresponding to the proposed appendixes 1 and 2 of the budget). 4. We recommend that all authorizations for salaries and supplies not spent during a given year lapse automatically at the end of the fiscal year. This will permit an accurate accounting and an exact appraisal of tha extent to which the intention of the legislator has been realized.l/ The B-a,dget ma provide specifically for holding over appropriations for public works and All other capital expenditures for one single fiscal year. Expenditures charged to such carry-over appropriations should be shown separately in the liquidac- iones, as are the present "remanentes" accounts. They should not be cumulative but should lapse automatically at the end of the second fiscal year. 1/ There is the danger of padding of expenditurea, i.e.. to spend during the * last month all remaining appropriations. Adhinistrative measures should be taken to avoid abuses. - 93 - Bibliography A. Sources of Fiscal Information Ministerio de Hacienda y Credito Publico, Presupuesto General de Egresos e Ingresos correspondiente al Ano Fiscal de ... (fiscal year 1944/45 through 1951/52). Memoria del Recaudador General de Aduanas por .., (1944 through 1950) Catalogo Official de Ingresos Fiscales: Managua, 1948. B. Fiscal Laws Impuesto Directo sobre el Capital: Managua, 1939. Rglamento del Impuesto Directo sobre el Capital: Managua, 1940. Impuestos sobre Derechos Reales: Managua, 1939. Leyes Hacendarias: Managua, 1948. Ley de Papel Sellado y Timbre: Managua, 1939. Bonos Pro Defensa Patria: Managua, 1943. C. General Background Information Constitucion Política Ley de Amparo y Ley Marcíal de Nicaragua: Managua, 1951. Nicaragua: Washington, D.C., Pan American Union, 1950, Economic Controls and Commercial Policy in Nicaragua: Washington, United States Tariff Commission, 1947. Mining and T¿anufacturing Industries in Nicaragua: Washington, United States Tariff Commission, 196. Ministerio de Economia, Informe sobre el Proyecto de Ley del Instituto de Fomento Nacioral de Nicaragua (mimeographed, Managua, 1951).