By Rodrigo Uprimny, EL ESPECTADOR, October 23, 2022
(Translated by Eunice Gibson, CSN Volunteer Translator)
The tax reform bill contains complicated technical points that will have to be addressed, for example, the one about how to structure the tax on sugary drinks to accomplish its public health purpose. But those fine points must not make us forget what’s at play, which is enormous: it’s learning whether Colombia can accomplish the structural tax reform that it needs to move toward being a country that is more just.
In this column, I reiterate that necessity, risking repeating what I have stated in previous columns, because I believe that the tax reform proposed by Petro and Ocampo deserves the support of every citizen who wants a better Colombia, even if they may have some reservations about the current administration.
A good tax system is characterized by some basics: i) it has to collect enough funds to allow the government to carry out its functions; ii) it has to be efficient; tax collection must not be expensive, and it has to avoid evasion; iii) it has to be simple, so as to facilitate economic activity; iv) it must be fair, not only at the level of horizontal equity (those who have equal ability to pay, pay the same taxes), as well as progressivity (richer taxpayers pay higher taxes).
Countries with tax systems that respect those principles have robust governments, inclusive development, and more equal societies, like some of the European countries, especially the Nordic countries. In Colombia, the Constitution incorporates those taxation principles, particularly in Articles 95 and 363, which state that all must contribute to finance government expenses, using the criteria of justice and equity, and that the tax system must be efficient, equitable, and progressive.
However, in reality, our tax system is terrible: i) it collects much less money than countries with the same level of development; ii) it’s not efficient, because it’s very tangled, full of exceptions and tax privileges for some, which makes collection difficult and facilitates evasion, which is extremely high; iii) because of those same privileges, it isn’t equitable, as, for example, companies with the same activities pay different taxes, simply because one of them was able to be in a free-trade area; iv) those privileges also distort and obstruct economic activity; v) finally, not only because those privileges benefit, most of all, the richest taxpayers because of the excessive weight of the IVA (value-added tax), our system is not progressive.
At the level of income tax, the richest 1% of Colombians pay taxes effectively equal or less than the middle class, as has been demonstrated by the Commission of International Experts in Tax Benefits in the Duque administration. The Commission also explains that inequality (measured, for example, by the Gini coefficient[1]) is not reduced at all after taxes and transfers, while in the OCDE (Organization for Economic Cooperation and Development) countries and even in several Latin American countries, like Brazil or Argentina, the reduction is very significant.
Petro’s tax reform bill has as its center the achievement of greater progressivity, eliminating or reducing tax privileges, and adopting new taxes that essentially affect richer citizens, such as the tax on estates valued at more than 3,000 million pesos (roughly USD $625,000 at today’s rates); or of pensions of more than 10 million pesos (monthly) (roughly USD $2,000 at today’s rates). This would simplify the tax system, make it more fair, and would increase tax collections without burdening the middle class or the general public.
[1] The Gini coefficient is a statistical measure intended to represent the income or wealth inequality within a nation or group. It was developed by the statistician and sociologist Corrado Gini.