Make the rich pay? the key points to the tax reform proposed by Petro for Colombia

The tax reform, one of Gustavo Petro’s campaign proposals, has already reached Congress with the promise of making the rich contribute to reducing the social debt accumulated for decades in Colombia.

Although the proposal did not generate the climate of protests and ungovernability caused by the reform proposed by his predecessor, Iván Duque, some business sectors said that it affects the poorest people in Colombia, explains journalist Nathali Gómez for RT.

The document was filed before the Legislature by the Ministers of Finance, José Ocampo, and of the Interior, Alfonso Prada. In principle, it will be debated in the economic commissions and then in the Senate and the House of Representatives.

As the Historical Pact bench has a majority in Parliament, after a process of national agreement between several parties, the president could see his first bill approved, which does not imply that the original articles will not be modified.The principles of the reform

The preamble to the ‘Tax Reform for Equality and Social Justice’ highlights that the proposal is based on the constitutional principles of «equity, efficiency and progressiveness», and is intended as a «contribution for the reduction of the historical social debt that the Colombian State has with its inhabitants». The latter has been a clamor of the citizens in the past, during different governments.

The accent is placed on pending issues that affect the most vulnerable sectors: poverty, hunger and inequality. In the same way, it is proposed to «reduce tax treatments» that have privileged the richest Colombian minority who, according to Ocampo, pay less than wage earners.

The text states that tax revenues in the South American country are «substantially low» when compared to others in the region. The average collection in Latin America is 27.3% of GDP, while in Colombia the percentage is 19.7%.What are the objectives of the reform?

The basic ideas are two:

* Reduce the inequitable exemptions that individuals with higher incomes and some companies have, and avoid tax evasion and avoidance, through the strengthening of the National Tax and Customs Directorate (DIAN).

* Achieve sufficient resources to finance the strengthening of the social protection system.What is the fundraising goal?

The tax collection goal is 25 billion pesos (5,797 million dollars), which corresponds to 1.72% of the Gross Domestic Product (GDP) of 2023 and 1.39% of the GDP between 2024 and 2033. It is expected that in the medium term to achieve 3.4% of annual GDP.This reform is directed to whom?

According to those who proposed it, the measures contemplated by the reform «would be reflected in a redistribution of income in favor of vulnerable households, with important effects on their well-being».

The direct benefit would be a significant reduction in monetary and extreme poverty. In 2021, the former was 39.3% and the latter reached 12.2%.

Inequality is also expected to decline by roughly nine times the average annual decline seen over the last 14 years.What taxes will natural persons pay?

* Limitation of tax benefits for those with incomes above 10 million pesos per month (2,300 dollars), which represents 2% of the population.

* Payment of taxes for people who receive pensions for more than 10 million pesos per month (2,300 dollars. This represents 0.2% of that sector.

* Tax of 0.5% on assets of more than 3,000 million pesos (about 693,000 dollars) and 1% for those greater than 5,000 million pesos (one million dollars).

* Decrease in tax exemptions for high income earners.

* Elimination of the three days without VAT established by the Government of Iván Duque in 2020.

* Elimination of the 4 x 1,000 tax (four pesos discounted for every thousand), known as the Tax on Financial Movements (GMF). It would only be applied to those who make transactions greater than 13.3 million pesos per month (about 3,000 dollars).

* Application of VAT for imported goods under 200 dollars, coming from countries that do not have an FTA with Colombia.

* Elimination of VAT exclusion and exemption from tariffs and the national tax on gasoline and ACPM in border areas.
What taxes will companies pay?

* There will be no increase in income tax, but the tax benefits will be limited.

* Decrease in exemptions for some sectors and companies.

* Redistribution of the benefits generated by high oil, coal and gold prices, through a 10% tax on a price calculated based on the export of these goods.

* Royalties will not be allowed to be deducted from income tax, because they are payments from private parties to the nation for exploiting the nation’s property.What are ‘healthy’ taxes like?

The biggest debate centered around so-called «healthy taxes,» even before Petro was sworn in as president. In this group the tax on sugary drinks and ultra-processed foods are included.

According to the project introduced in Congress, the reform seeks to reduce «negative externalities», which are the harmful effects caused by the activities derived from production and consumption of certain products on society, on the general health of the population and on the environment.Sugary and ultra-processed drinks

Sugary drinks are considered those that have natural or artificial sweeteners or added sugars. Included in this definition are carbonated beverages; malt-based, tea, coffee, fruit; energy drinks, sweetened or flavored waters and powder mixes, among others. Only dairy products with specific characteristics are exempt.

The tax will be borne by the producer, the importer, or whoever is economically linked to both. The tax will be 10% of the sale price of the product.

The ultra-processed include snack-type foods, packaged sweets, cookies, canned meats, cakes, chocolates, cereals, sauces and soups, among others. These taxes will be guided by the same type of tax on sugary drinks.Voices against the reform

Faced with the accusations that these taxes would only affect families in poverty, who tend to acquire this type of products (sugary drinks and  ultra-processed food and sweets) more frequently, those responsible argue that through the price they could reduce their consumption and, therefore, the incidence of diseases. such as diabetes, hypertension and obesity. This decrease would also impact in the decline of this type of patients in the health system.

In the midst of the controversy, the Government had to deny that products such as mortadella, butifarra and sausage, among others, had been included in the basic food basket, despite the fact that they also fall into the ultra-processed category.

In Colombia, the lobbying by business groups related to the production of ultra-processed foods and sugary drinks is a traditiona, says Vorágine, which is why in the past they have managed to modify or stop the measures that they consider to be detrimental to them, such as the ‘Junk Food Law ‘, approved after two years of being introduced before the Legislature.

In addition, some of the business men in these industries have ties to or own media outlets, so information is often published against decisions that affect them.Environmental taxes

With the tax reform, a tax on single-use plastics will be created and the tax base for the carbon tax (thermal and mineral coal, fossil fuels, oil and gas derivatives) will be expanded.

A 10% tax rate will be applied to exports of crude oil, coal and gold.

With regard to the carbon tax, created in 2016 to discourage the consumption of fossil fuels, a fee will be assigned on the carbon emission that depends on its degree of contamination.

The reform proposes to modify the base of this tax, taxing the sale, import and withdrawal of thermal coal, and keeping the one used in coke ovens excluded. This modification will be carried out gradually until reaching the full rate in 2028.

More criticism of the reform

The former Minister of Finance, Rudolf Hommes, according to the media outlet Semana, considers that although the richest will be affected by the reform, those who are in charge of the industries may have «harmful business behavior» that would end up impacting consumers, because there would be an  «undesirable increase in the cost of capital”, which can inhibit private investment.

The project recognizes that the elimination of VAT exemptions on fuel at the border will cause its price to rise, which would directly affect the most vulnerable sectors. Some analysts point out that this could generate popular discontent.

The price of the gallon would be around 21,000 pesos (4.9 dollars), which, according to the transport sector, could represent a double or triple increase in food of the basic food basket of the areas bordering Venezuela, according to the media outlet Marca.The social explosion

Although the first debate of this project, introduced by the incoming Administration, has not yet taken place, there are high expectations from the popular sectors and there are no protests in the streets.

This situation is diametrically opposed to the one experienced last year, when Duque filed his tax reform before Congress, which contemplated increasing VAT on products and services, eliminating the exemption from this tax on basic foods, and reducing the minimum amount from which citizens must pay taxes. The collection goal was 6.8 billion dollars to alleviate the effects of the economic crisis caused by the pandemic.

In a climate of high conflict, after the announcement, a protest began against the failed tax reform that resulted in the paralysis of the project and the departure of the Minister of Finance, Alberto Carrasquilla.

These mobilizations gave rise to the demand for the fulfillment of other demands such as free access to public university education, the creation of a basic monthly income for millions of families and the comprehensive presence of the State in the regions where illegal armed groups operate.

When the protest had already gotten out of hand, Duque announced changes and introduced a new text to the Legislature that he called the ‘Social Investment Law’. Although the VAT increase was eliminated, the income tax base was expanded and a basic income was included for 4.1 million households, the consequences of the demonstrations had been felt in his government and in the country .

This was yet another setback, since in 2018, Duque proposed a first tax reform that was declared unenforceable by Congress. In 2019, the former president returned with the ‘Growth Law’, which although it was approved in Parliament, was also rejected by the population and generated demonstrations.