Colombia’s first leftist authorities in fashionable historical past has focused the nation’s wealthiest residents and its commodities exports in a tax proposal that represents a major shift for the historically conservative nation.
The proposed tax overhaul “shouldn’t be considered as a punishment or a sacrifice”, Gustavo Petro, the nation’s new president, stated throughout his inauguration speech on Sunday, a day earlier than sending the invoice to Congress. “It’s merely a solidarity cost that somebody lucky makes to a society that has enabled them to generate wealth.”
Some analysts described the proposed reforms as extra pragmatic and fewer radical than feared when Petro was elected. Nonetheless, they fear the reform is probably not sufficient to sort out the fiscal deficit whereas funding the formidable social programmes that he promised on the marketing campaign trial.
The invoice, introduced on the primary day of Petro’s authorities, seeks to lift an extra $5.8bn subsequent yr, about 1.7 per cent of gross home product. It initiatives a median of 1.4 per cent in annual new revenues for the subsequent 10 years after that.
The proposal features a tax improve for these making greater than $2,300 a month — Colombia’s high 2.4 per cent, in line with its finance ministry. It might additionally introduce an annual wealth tax on financial savings and property above $630,000.
The invoice despatched to Congress features a 10 per cent levy on exports of oil, coal and gold when their costs are above a world reference of $48 per barrel for oil, $87 per tonne for coal and $400 per troy ounce of gold. The value of benchmark US crude oil is at present $94 per barrel, Colombian coal is averaging about $140 per tonne, and the value of gold is about $1,700 per ounce.
Oil and coal are Colombia’s top two exports, valued in 2019 at $12.9bn and $4.8bn, respectively, whereas gold exports totalled $1.6bn. A dividend tax on abroad traders who personal shares in Colombian corporations would double from 10 per cent to twenty per cent.
The extra streams of income are essential to funding the generational change the president has promised voters. Throughout his marketing campaign, Petro, a guerrilla fighter in his youth, pledged to halt opencast mining and new oil and gasoline exploration contracts alongside numerous progressive reforms, corresponding to funding common healthcare and better training and supporting wholesale land and pension reform.
A failure to ship dangers shortly angering his supporters, tens of hundreds of whom took to the streets final yr, initially to protest a tax reform proposal that will have raised VAT.
“As we are saying in Colombia, ‘campaigns are poetry however authorities is prose’, and the financial and financial actuality is sophisticated,” stated Luis Fernando Mejía, the manager director of Fedesarrollo, a Colombian financial think- tank.
The proposal comes because the Colombian financial system faces headwinds. The fiscal deficit this yr is projected to achieve practically 5.6 per cent of GDP and should be adjusted downwards by 2 factors of GDP subsequent yr in line with the pre-existing fiscal rule. Costs are rising shortly because the nation emerges from the coronavirus pandemic — annual inflation is 10.2 per cent, the best since 1999, whereas near 40 per cent of individuals dwell in financial poverty.
“A part of this reform will likely be allotted to decreasing the fiscal deficit,” Mejía stated. “One other half will go to spending, consistent with the social programmes that the federal government has mentioned.”
The nation’s tax income is about 19 per cent of GDP, however simply 5 per cent of the inhabitants paying private taxes, in line with the OECD. The common for OECD nations is 33 per cent.
Petro’s Yale-educated finance minister, José Antonio Ocampo, has pledged to sort out tax evasion and avoidance, saying that revenues could be elevated by modernising Colombia’s assortment company. Over half of Colombia’s workforce is estimated to be within the casual financial system.
Regardless of the challenges, some economists stated that the reform invoice might be a mannequin for different progressive governments who’ve praised its proposed improve in capital positive aspects taxes.
“In Colombia, the reality is that we’ve by no means had a reform that was targeted on making the individuals who have probably the most pay,” stated María Fernanda Valdés, co-ordinator of financial affairs at Friedrich Ebert Stiftung, a political basis. “Nearly all the time the try was made to make the center class pay, corresponding to by rising [value added tax]. If it passes, it might be the primary of a wave of comparable reforms in Latin America.”
The invoice requires approval by Congress, the place Petro has a majority coalition made up of centrists from conventional events in addition to leftist outsiders. It’s nonetheless prone to be amended by lawmakers.
A lot of Colombia’s highly effective enterprise associations had on Wednesday but to make formal statements concerning the proposed reforms. However sure provisions, corresponding to a tax on sugary drinks, processed meals and single-use plastics, are prone to fear them.
Erica Fraga, senior analyst for Latin America and the Caribbean on the Economist Intelligence Unit, a think-tank, stated that the presentation of a “affordable” tax reform on Petro’s first day in workplace confirmed an try to safe fast wins in Congress.
“Nonetheless, Mr Petro’s pragmatism will even drive him to simply accept the dilution of his radical agenda,” resulting in stress between his leftist allies and conventional events, Fraga stated. “The danger of political turbulence and social unrest when his honeymoon interval with each Congress and voters ends stays excessive.”
