A Burden of Prosperity

Tax reform and wealth tax introduction

Colombia is in the midst of a comprehensive tax reform that has roused debate amongst the majority of the country’s top business leaders, first and foremost for its proposal of […]

Colombia is in the midst of a comprehensive tax reform that has roused debate amongst the majority of the country’s top business leaders, first and foremost for its proposal of a comprehensive wealth tax. The tax measure was as good as finalized in February 2015 when the senate passed a tax law that will earn the government 53 trillion pesos ($22.3 billion) over the next four years. In the Colombian case the temporary wealth tax is focused on businesses, rather than individuals and is set to raise 12.5 trillion pesos in 2015 alone. Under the new tax regime, firms will pay taxes in accordance with their revenues, and in terms of business practice, the decision should incentivize companies to maximize efficiency.

Critics have opposed the measure, on the grounds that it could deter foreign and domestic investment, arguing that the country’s publicly listed companies have been hit hard by falling oil prices and the depreciation of the peso, and are unlikely to see a rise in FDI and domestic investment under such conditions. The initiative also coincides with rising competition in the private sector.

Perhaps one of the main advocates of the wealth tax system has been the French Economist Thomas Picketty, who was awarded the French Legion D’Honneur award—which he declined—for his recent research and authorship of the international best seller Capital In the Twenty-First Century. The work addresses the reality that inequality was worsening in many parts of the world, including in Colombia. Picketty identified this inequalityas a negative characteristic of capitalism that must be corrected through state intervention and the introduction of wealth taxes.

The central thesis here is that when the rate of return on capital (r) is greater than the rate of economic growth, an ever-increasing share of national wealth is concentrated in the coffers of the rich. Indeed in Colombia, this phenomenon has not significantly improved over the past 15 years, according to the Allianz Global Wealth Report 2014.

However, the main motivations behind introducing the short-term tax have more profound social implications and ethical dimensions. The reforms are a means of paying for the peace process, which is expected to cost in excess of 80-100 billion pesos over the next ten years for the development of a rural policy alone, as well as balancing public accounts and the estimated $15 billion dollar public finance deficit of 2015.

However the tax reforms are causing uproar, particularly among the Consejo Gremial Nacional, (National Business Council), the national advisory union. In October 2014, the organization submitted an official request to the Finance Ministry arguing in favor of the current tax system, and for a 10% corporate tax. In theory the Ministry of Finance has finalized its decision to impose the wealth tax, even if they not decided on a definitive rate.
As a result of union pressure, the government has agreed to a smaller increase in the wealth tax than it had originally proposed, in exchange for a rise in a profit tax, following consultations with business leaders. It is expected to raise 35.3 trillion pesos from businesses and 800 billion pesos from individuals.
Businesses will pay a wealth tax of 1.3% in 2015, 1% in 2016, and 0.4% in 2017, after which the tax are to be removed. As for the separate profits tax, or CREE, this will levy a 5% charge on profits of above 800 million pesos in 2015, 6% in 2016, 8% in 2017, and 9% in 2018.

Colombian’s celebrated Finance Ministry desperately needs the short-term monetary gains to address the impending financial shortfall. However, these changes also fit with the agenda of a long-term transformation of what Colombia means as a place in which to do business; a statement that Colombia can and will be competitive on its own terms. Only time will tell whether Cardenas’ plans have been a stroke of perfectly calculated monetary policy, or an untimely decision to levy taxes on industries that drive growth.

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