Source: Anadolu Agency
After several months of waiting, the Colombian government unveiled a tax bill intended to address the fiscal and social crisis triggered by the COVID-19 pandemic. However, the proposed bill has not been well-received, and the following verdict has been almost unanimous: the proposal punishes the Colombian middle-class and jeopardizes economic recovery. This is the third, and the most critical, tax bill introduced by the government of President Iván Duque in less than three years. Unless an agreement is reached in Congress in the coming months, Colombia could risk its post-pandemic socioeconomic recovery.
The main objective of the reform is to stabilize public debt and reduce the fiscal deficit, which rose to 7.8 percent of GDP last year, up from 2.5 percent in 2019. If the bill is not approved, the deficit would likely be 8.6 percent in 2021. Such an increase could affect international scale credit ratings, corporate credit, and investors’ confidence, translating into low economic growth and government incapacity to sustain social expenditures.
To avoid this fate, the bill introduces key changes echoing recommendations made by expert commissions, think-tanks, and multilateral institutions to increase government revenues—which are among the lowest in Latin America as a percentage of GDP. These include a gradual removal of tax benefits, an increase in the dividend tax rate, the elimination of value-added tax (VAT) exemptions, a broadened tax base for personal income tax, and the creation of a wealth tax.
The bill also expands and improves social expenditures. It establishes a universal basic income for the poorest households, increases transfers to pay for public higher education tuition fees, creates subsidies to cover non-labor costs in firms that employ vulnerable demographic groups, and compensates poor households with cash transfers for the VAT that they pay. Overall, the bill would increase incomes for poor and vulnerable households while taxing the rich and reducing fiscal pressure, according to the government.
Source: Gobierno de Colombia
The political class, however, is not convinced. With less than a year remaining until Colombia’s congressional and presidential elections, political instincts indicate that it would be safer for lawmakers and presidential candidates to oppose the bill. Political parties close to the government have already announced their opposition, and the party of President Duque, Centro Democrático, is showing little support. Leftist presidential candidate Gustavo Petro has attacked the bill, saying that it “reduces real wages and keeps subsidies for the ruling class,” while centrist candidate Sergio Fajardo has praised some of its elements while noting that it can still be significantly improved. Germán Vargas Lleras, a former vice president, has argued that the reform is expropriatory and synonymous with “collective political suicide.”
Beyond politicians, the bill has also been critiqued by Colombians throughout the country. Nationwide strikes, supported by the majority of the population, took place this past Wednesday and could be extended for the coming days, likely increasing the pressure on Congress to sink the reform. Additionally, President Duque’s approval rating has fallen since the bill was announced.
The COVID-19 pandemic has ravaged the Colombian economy and unemployment remains above 15 percent. The national poverty rate is estimated to have increased to almost 50 percent during 2020, up from 37.5 percent in 2019. Unsurprisingly, taxation is not the primary focus for Colombians right now, which has likely played a part in the negative reaction to the proposed bill.
Still, the government’s tax reform may have a chance. With the appropriate changes, the Duque administration could advance a reform that allows for a simpler, more efficient and equitable tax system without provoking animosity among politicians and civil society.
The bill should include, for example, stronger measures to combat tax evasion and corruption—something barely mentioned in the initial reform’s introduction. Business income tax evasion has been estimated to be close to 50 percent (around five percent of GDP), while VAT evasion is around 23 percent, or two percent of GDP. Corruption costs Colombia between 1.6 percent and five percent of its GDP every year. Additionally, a faster elimination of tax reliefs and exemptions that benefit the wealthier sectors of society—almost one percent of GDP—could assist the country’s recovery from the current economic crisis. When combined, these efforts would total more than three times the revenue expected to be collected by the current bill.
In a country increasingly concerned about corruption, restructuring the bill to more actively outline anti-corruption efforts could allow the government to galvanize greater support for the reform.
Current circumstances have given Colombia the rare opportunity to advance an ambitious and comprehensive tax reform. Decisive leadership from President Duque to bring together disparate political factions and civil society in support of the bill could help produce the necessary adjustments and garner popular approval to make the proposed reform a reality.
Daniel Payares-Montoya is a research fellow at the University of California’s Center for Latin American Studies at Berkeley.