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Colombia new tax reform

 Colombia new tax reform 


September 14, 2021 was marked by ending street protests after Colombia’s Congress passed and former president Iván Duque Márquez signed into law a new tax law dubbed as the Social Investment Law. The tax law is expected increase the general rate for income (foreign and domestic) to 35 percent and financial institutions must pay this tax at a rate of 38 percent until taxable year 2025.[1]

 

So why did the newly elected president Gustavo Petro also create another new law?  The current administration knows that their ideal opportunity and moment is in the first year of his presidency to propose tax reforms, even though the public saw tax reform last year.

 

The new law proposes to increase collection from the 13% of GDP that the State receives to 16% (which is more of the norm among the Latin American economies. Accordingly, “The objective of the [new] reform, then, is to increase this collection by 1.72% of GDP, about US$5,500 million, by 2023. It is a similar sum to that proposed by Duque's reform last year.”[2]

 

Frist the proposed tax reform law is to increase the total amount of income for the stand. Second, the new tax reform proposes to simply the tax code and third, it is reported to reduce inequality. The proposal would also increase subsoil income, such as oil and coal, which is often problematic in Latin America.  By taxing the 1% income earners the initiative of the new tax law would increase taxes on soda and sugar, cut loopholes for companies and increase social welfare for the lower income earners of society.

 

Much of the proposed tax code that he will try to seems to question the impacts on the business environment.  Yet, the proposed progressive tax code seems to be in search of minimizing the impact on the environment and changing to healthier lifestyles of the population such as the tax on sugary drinks, ultra-processed foods and single-use plastics will be raised.

 

From the point of view of public finance, you always have the problem that taxes cannot transfer stock (wealth) without double taxing intertemporally.  From this perspective, it is argued that the law might discourage capital savings or capital investments (where the rich have more capacity for income mobility). But this assumes that everyone has already paid their taxes prior to the accumulation of such wealth. Yet, we know that in Latin America, this may not have been the case.  

 

Furthermore, without equivalent growth to pay for its novel plan, the Colombian government may have created unintended economic and political consequences as each party looks to find alternative ways to encourage revenues, and thus further tax the very people which it intends to help. The continued instrumentalism could drive the bus and not encourage overarching reforms necessary for redistribution policies with economic development.

 

As Franklin D. Roosevelt stated about the United States “not only our future economic soundness but the very soundness of our democratic institutions depends on the determination of our government to give employment to idle [person].” But what happens when no new revenues are available to pay for jobs and the quick or snap ability by the executive to destroy the state with regressive increases in taxes and without a diverse tax base in which to pay for these benefits?

 

In theory, "there is no agreement about the impact of such changes on economic activity, but the Keynesian view predicts that an increase in public spending increases aggregate demand (consumption and investment), employment and wages. Higher incomes stimulate even greater aggregate demand in a virtuous spiral that multiplies." The Bank of Colombia authors of this study found that the multipliers are high enough to spur growth within Colombia. That in and of itself will also help their neighboring countries.[3] 

 

If you want to balance these two effects, then it makes sense to tax the wealth and put together a more progressive tax schedule (such as the one that the Colombians have done in 2021). The challenge for Colombia and many countries in Latin America is not the rate of taxation, but the administration of the taxes, for example, by who and how they are collected, which is much more complicated and depends greatly by the capacity of the state to wield its power. On the other hand, the key to redistribution is to think about how the government plans to use the resource collected and if they are therefore fair in the redistribution. 

 

For now, we need to recognize the sovereignty of the Colombian people and the wishes of the new Petro government to see how the new tax reforms may unfold especially in the post-covid global economy.

 

The author would like to thank Economist Guillermo Lagarda for his perspective.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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