On July 20, the Colombian government introduced a new tax reform bill to Congress. Not only is it one of the few Latin American governments that decided to implement such reform in the midst of the pandemic, but it had to withdraw in May the controversial previous bill that led to the biggest wave of protests in Colombia in the last 100 years.
The government has learned the lesson. This new reform is much more modest and the new Minister of Finance Juan Manual Restrepo – the previous one had to resign – tried to reach a consensus with the private sector and the political sectors on its content.
This reform does not “walk on the feet” of anyone and its presentation underlined the positive aspects of the expenditure to be financed with the new revenues. This is a reform intended to gain in governability.
Tax collection
The project is expected to raise 15.4 trillion pesos (about $ 4 billion at the current exchange rate), or 10 billion less than the failed reform in April.
With these revenues, the government hopes to restore fiscal balance, embark on the path of recovery of the debt rating by international rating agencies – Fitch and Standard and Poor – recently lost and fund social programs to mitigate the losses. effects of the pandemic, policies to boost employment and meet certain demands arising from recent protests.
The Minister of Finance estimates that the bulk of this revenue – around 70% – will come from the business sector, the rest coming from the control of public spending and the fight against tax evasion.
The contribution of companies comes from an increase in the tax rate from 30% to 35% and a temporary surtax (until 2025) on the financial sector of 3 percentage points. It also comes from a reduction in the deduction from 100% to 50% of the Industrial Tax that companies can make when calculating their taxable profits.
Although it is too early to project new revenues, some analysts are pessimistic about the government’s ability to cut spending. This is because they are usually very strict because they are constitutional or legal mandates, and because in an election campaign year, like this one, significantly reduce the hiring of staff. is not easy.
In terms of reducing fraud, it is true that there has been progress, but the process has been slow and, although the National Directorate of Taxes and Customs (DIAN, in Spanish) is modernizing, it does not probably does not have the full capacity to implement all the necessary measures.
Spending programs
The programs that the government hopes to finance with these resources aim to improve the situation of the groups most affected by the measures implemented to control the effects of the pandemic, support job creation as a fundamental element of economic recovery and respond to some of the demands of young people during recent protests.
One of these programs is called Renda Solidária, which involves a monthly transfer of 160,000 Colombian pesos – about $ 42 – to the poorest families, according to Sisben (System for identifying potential beneficiaries of social programs). The government’s objective is to be able to maintain this program until the end of 2021.
In terms of job creation, the government has the PAEF (Program Formel d’Aide à l’Emploi), created last year, to subsidize companies so that they do not lay off their employees, and has proposed a program subsidies for the new generation of jobs.
The latter is aimed at companies with less than 50 employees and encourages the hiring of young people under 28 years old. The government will pay 25% of the minimum wage – around $ 260 – for each new young worker and 10% if he is over 28. The goal is to maintain this program until August 2023.
Finally, it should guarantee free enrollment in official universities and technical and technological training institutes for all low-income students. In fact, this is already implemented in some cities, such as Bogotá, but the idea is to make it a permanent national policy.
The Colombian political context
The political context determined the new tax reform proposal. In March 2022, the Senate and the Chamber of Deputies will be completely renewed and on May 29 the first round of the presidential elections will take place. The country is emerging from the biggest social protest in its recent history – there are still young people on the streets, the so-called front line – which has profoundly affected economic recovery and job creation.
Recent reports from Cidh and Human Rights Watch have been very unfavorable to the government. Not only because of the government’s treatment of law enforcement, but also because of the long series of killings of social leaders during the period.
The government is also facing the third peak of the pandemic, the highest and longest to date, which has limited the ability of the president and his party, the Democratic Center – chaired by lvaro Uribe – to govern.
Under these conditions, it was not expected that the government would present an in-depth reform that would seek to resolve the structural and equity problems plaguing the country.
What the government is looking for with this new project is a reform that will allow it to gain time to organize itself as well as possible for next year’s elections. Thus, the government leaves it to the next president to find solutions to the social and economic problems that the pandemic and the protests have brought to light.
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