With a still-uncertain peace hanging in limbo, some segments of Colombia have already moved on to the next big thing. A looming tax reform bill has been sent from President Juan Manuel Santos’ office to Congress, where it will face debate and eventually a vote. The outcome will have long-lasting and profound repercussions on both family budgets and the national economy.
Few people are actually excited to pay higher taxes, but there are currently two opposing camps that have emerged around a plan that centers on increasing the nation’s value-added tax (IVA) rate from 16% to 19%. There are those who cannot fathom why the country would raise taxes at a time like this and others who think this is a necessary, overdue overhaul.
On top of the political chaos the nation was thrown into by the “No” vote in the October 2 plebiscite to strike down a peace deal with Colombia’s largest guerrilla group, inflation has been out of control this year. It hit a peak this summer of 8.97% — more than double the high end of the central bank’s target range of 2% to 4%.
Inflation has since begun to fall back down, and most analysts project it to end the year closer to 6%. But the damage has been done, especially with food prices skyrocketing earlier this year. This only further strained wallets that have been hit by a massive devaluation of the peso in recent years. The result is that many Colombians are just trying to pay their bills and get by each month — and now they have to turn on the news and listen to the Reforma tributaria plan that will hit their income even harder.
On the other side of the spectrum are the bankers and economic analysts. To them, the math is simple. Given the huge fall in oil prices over the past two years, there is a giant hole in government coffers. This revenue must be made up somehow. Taxes are the only viable answer.
With the national debt ratio going the wrong way and other key economic indicators following suit, the reform is needed — and now. ANIF, a Bogotá-based economic think tank, has been pushing for these changes since at least 2012.
In the balance is the nation’s current investment-grade credit rating, a factor that remains paramount for Finance Minister Mauricio Cárdenas. If the fiscal holes in public financing, as well as the current debt, is not dealt with, that coveted rating may fall to junk status and have major effects on the nation’s ability to borrow money on the international market while scaring off investors.
ANIF head Sergio Clavijo believes that the Colombia’s credit rating may not even be safe with more tax revenue coming in. And everyone from international credit rating agency Fitch Ratings to Bancolombia, the country’s biggest bank, has expressed concern about the potential effects if Congress only approves a watered down version of the reform.
But the bill, as presented, is seen as prudent and substantial. “The tax reform currently being discussed in Congress will lead to ease fiscal pressures in the coming years and to stimulate productive investment,” said Bancolombia in its recent economic forecast.
Rating agencies Moody’s and Fitch say the same, as does London-based research group Capital Economics. “The bill is impressive and, if passed fully, would put the public finances on a stronger footing,” said the company in an investor note.
To them, tax reform is a temporarily painful solution that is nonetheless essential. Higher taxes will have negative short-term effect on inflation and consumer consumption, they say, but the big revenues coming in from oil royalties were previously masking a system that was out of whack. Compared to the rest of the world — and even other Latin American nations — Colombian companies pay a much larger percent- age of overall taxes while citizens pay much less.
Along with the proposed increase in IVA (plus new taxes for tobacco, sugary drinks, and dividends), the reform seeks to cut the effective corporate tax rate from 42% to 32%. Analysts say that will be beneficial to long-term private investment and overall economic growth.
No amount of textbook theories, debt-ratio discussion, or fiscal policy vigilance will convince most Colombians that a tax hike is in anyone’s best interest. They may be right. The cost of living is already more than many can bare, and most everyday citizens outside of the financial world who have spoken to The City Paper say the same.
Congress might be swayed by their perspective. Finance Minister Cárdenas has been steadfast in his public comments, however, saying that the bill has enough support among lawmakers. He is confident that the reform will pass.
Then again, most government officials thought the same thing about the plebiscite. And we all saw how that turned out.