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The need to generate more resources, added to the crisis induced by COVID-19, open the door to rethink the structure of the tax system in Colombia, instead of falling to the poorest, as is usually done with this type of initiative.
Since the Minister of Finance, Alberto Carrasquilla, spoke in the middle of 2020 of the need to raise $ 20 billion to face the delicate fiscal situation of the country and adjust cash, it was clear that in 2021 there would be a tax reform.
Although a new discussion on taxes does not seem anything new in a country that undergoes a tax reform every year and a half, the dramatic social and economic crisis that we are experiencing makes the next tax crisis probably the most important in our recent history. Hopefully the country will be able to bet on a reform that not only complies with what our Constitution requires (an equitable, efficient and progressive tax system), but also supports a process of economic reactivation, and is in line with the latest generation tax reforms.
It is important to note that Colombia’s tax problem dates back to long before the pandemic. The tax burden in the country has historically been very low and in recent years we have collected a little more than half of what is registered by the OECD countries. At this moment we do not reach 20% of the GDP of collection, and a country with those numbers cannot think about making policies to overcome a crisis nor can it guarantee welfare of any kind.
In addition, our tax structure has always had an unfortunate regressive bias that ends up manifesting itself in insignificant burdens for the richest people and other strong ones on the middle and lower classes. Just to illustrate, while a person belonging to the richest 10% in the European Union pays on average 21.3% of their income in taxes and in the US 14%, that same person in Colombia would pay less than 5% . Having such a tax system is not only bad for one of the world’s most unequal countries, it is also a brake on recovery.
For that reason, if Colombia wants to get out of this crisis, the next tax reform should not only aim to raise the $ 20 billion that Carrasquilla needs, but it should also face the structural problems that we have, starting with a more dramatic increase in the tax burden, but above all to move towards a progressive structure.
For the latter, it is essential to reinforce taxation on personal income and wealth, and to thoroughly review tax benefits, starting with those that this Government passed in 2019 and those that have continued to happen in its “covid-decrees.” Furthermore, if the country wanted to be in line with the latest generation reforms and with what is being talked about in the national and international academy, this new reform should have, in addition to a vision that promotes equity, an environmental perspective that encourages the reactivation of green sectors and an explicit gender approach, a strong orientation towards the fight against abusive international taxation, mainly taxing those mostly foreign digital companies that have benefited from this crisis, but do not pay taxes in this country or in no other.
Now, it is true that thinking about a reform like this could seem difficult in the midst of this emergency. However, the experience of other crises has taught us that exceptional windows of opportunity are currently opening up that tend to accelerate reforms. This is mainly due to the enormous increase in resource needs that come with crises, which, in our case, is so serious that if we do not act quickly we are at risk of losing our investment grade.
In addition, do not underestimate a notable international change that supports this type of progressive reforms. Just a few weeks ago in the UK, a group of leading economists and tax experts brought together by the London School of Economics and the University of Warwick concluded that “targeting the wealthiest in society would be the fairest and most effective way to collect taxes in response to the pandemic ”. Similar changes could come from Biden’s United States and elsewhere.
There is, however, an imminent risk that a reform rushed by the need for resources will not have the progressive, inclusive and green orientation that Colombia needs. In order not to go any further, the country is proposing that it be in part the poor and women (who spend the most on basic products, according to a new study by Ávila and Lamprea-Barragán), who pay those $ 20 billion through a VAT on the basic basket. In order not to starve the poor of this country, it is being considered to create an aid of the Solidarity Income type that, unfortunately, has important limitations mainly due to the little development of the digital payment system in various areas of the country, as shown by the recent study by Londoño-Vélez y Querubín. Let’s hope he gives up on treating the poorest in the country like guinea pigs.
The new tax reform that Colombia needs will require, then, an important leadership of political sectors that manage to initiate a dialogue with all the actors and create a common narrative that highlights how beneficial an initiative of this style represents for the vast majority. All this must be supported by civil society, academia and citizens, who have been calling for this type of reform for a long time.
There will be a group in Congress and the Government that, as it has done in the last reforms, will want to stop all kinds of participation by postponing the discussion until well into December, so that between custard and donut, stealthily, they can move to a clean “desk” a dangerous reform for the country. Let’s not let them steal our chance for fair tax reform again.
* Ph.D in economics, coordinator for the Friedrich Ebert Stiftung in Colombia.
