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COLOMBIA: More Taxes on the Poorest

Helda Martínez

BOGOTA, Jul 19 2006 (IPS) - Colombian workers will see their purchasing power cut if the legislative Congress approves a tax reform measure being presented by Álvaro Uribe’s administration on Thursday, Jul. 20, the anniversary of Colombia’s independence in 1810.

This will be the fourth tax reform in Uribe’s first term as president (2002-2006), and is being called a “structural reform” because, unlike the previous reforms, which were limited to partial modifications to the tax law of 1970, this new proposal entails substantial changes.

Uribe will be sworn in for a second term as president on Aug. 7, having won the May 28 election with 62 percent of the vote. His reelection was made possible by a reform of the constitution which Uribe promoted.

“This is a very tough tax reform that could only be presented by an administration like Uribe’s given the support he has. It favours big capital, while expanding the tax base, and considerably increases taxes on a family basket of goods for the lowest-income social sectors,” Jorge Robledo, senator for the leftwing Polo Democrático, told IPS.

The basis of support for the president, according to Robledo, is “people’s mindset that it’s either ‘Uribe or the guerrilla groups,’ and with that logic, they think ‘Uribe, whatever happens!’ Of course, it will also have a limit, and this will be the poverty that is approaching.”

Once the election result was known, Uribe and his economic team promoted the tax reform, which will enter into force if approved by the Congress, where the governing party has a majority.

However, political sectors allied to the administration, led by Senator Germán Vargas Lleras, have distanced themselves from the text proposed by Uribe and announced they are drafting a counter proposal.

Uribe’s proposed tax regime would increase the tax burden mainly on middle- and low- income people, since it plans to impose value added tax (VAT) on close to 70 percent of the food items included in the family basket of goods.

The tax will be imposed specifically on foods, as other items in the basic basket, such as health care, have already been taxed in previous reforms by the current president.

“By definition, the extremely poor or indigent are people whose income is less than the cost of a basket of foods that meets their minimum nutritional needs. And the poor are defined as people whose income is insufficient to pay for the basic basket of goods, which includes food, housing, public services, education and medicines.”

This was explained to IPS by Ricardo Bonilla, co-author of the report “Well-Being and Macroeconomics 2002-2006: Inequitable Growth Is Not Sustainable”, which was launched this month in Bogotá and describes research carried out by the Centre for Development Research (CID) of the National University of Colombia and the Office of the Comptroller General of the Republic.

The CID calculated the cost of the family basket of goods in 2005 at 290,000 pesos (116 dollars) per person per month, while the government Department of National Planning’s estimate was 225,000 (90 dollars).

The minimum monthly salary for 2006 was set at 408,000 pesos (163.20 dollars), and although an updated figure is not yet available for the cost of the family basket, it is estimated to be six percent more than last year’s cost.

According to the 2005 census, families in the lower- and middle-income strata are typically composed of four persons, who often subsist on just one minimum salary plus additional income from work in the informal sector.

At present, VAT has nine bands with different tariffs which are applied according to the product, the 16 percent band being the most widely used.

The reform is proposing three differential VAT tariffs. The lowest, at 10 percent, would apply to the basket of foods. The middle band, at 17 percent, would apply to most consumer products, and is one percent higher than the present generally used tariff. The highest, at 25 percent, would apply to so-called luxury items, including cars.

“Not everyone who owns a car is rich, but even with this exception, the reform will no doubt affect the poorest, who will have to pay tax on foods,” Bonilla added.

Those who back the reform say that the VAT will not affect the pockets of the poorest, because the tax will be reimbursed to taxpayers in economic strata one and two, the lowest income classes according to Colombia’s socioeconomic classification, representing more than twenty million people.

Reimbursement would be handled through regular or savings accounts at banking institutions, or non-bank agencies in shops, drugstores and small businesses, and would be regulated by a state programme called “bank of opportunities”.

“This has to be seen as a new opportunity for financial capital to make more money, because people who can afford to open a bank account will pay banking fees, and those who can’t will be at the mercy of local politicians who will decide arbitrarily who will be reimbursed, and who will not,” Robledo said.

“Thinking about reimbursement of the taxes is too complicated,” echoed Bonilla.

“People would have to go from store to store collecting sales receipts. And we know the size of the country, and its geography. There are villages where the State has no presence at all,” the researcher added.

“Even if they were successful in reimbursing a percentage of the tax money collected, this is a perverse instrument of patronage. It is not a democratic tax structure,” the opposition member of parliament said.

Meanwhile, attorney general Edgardo Maya Villazón, in charge of the institution that supervises transparency in public affairs, reminded the Finance minister, Alberto Carrasquilla, that in 2002, taxes on foods were declared inadmissible by the Constitutional Court, which is responsible for checking the constitutionality of proposed laws.

Uribe included VAT on foods in the text of his first tax reform, when a “security tax” of 1.2 percent on inheritances worth more than 169.5 million pesos (67,800 dollars) was approved. In spite of food taxes having been declared incompatible with the Constitution, Uribe is proposing them again in his “structural reform.”

In the second reform, VAT of seven percent was imposed on packaged foods and on pre-paid medicine. Now 10 percent is levied.

In 2003, inheritances of more than 3 billion pesos (1.2 million dollars) were taxed. The number of people obliged to declare their income was increased, and taxes on bank transactions rose from 0.3 percent to 0.4 percent.

“It has to be said that ever since the administration of Belisario Betancur (1982-1986), economic reforms have had a clear direction towards reducing income tax and increasing VAT contributions. On the one hand, contributions from the profits of companies, monopolies and transnationals are lowered, and on the other, the sales tax burden on low and middle income people is increased,” senator Robledo said. “But in Uribe’s case it is egregious,” he added.

Robledo’s statement arises because, in contrast to the tax increases on basic products, the reform plans to lower taxes paid by companies on their profits, from 38.5 to 33 percent in the first year and to 32 percent in the second, with the aim of reducing it to 30 percent in subsequent years. 07200447 ORP004 NNNN ZCZC ORP005 QD [ SPAM SCORE/REQ: 05.60/05.00] ROMAIPS LA DV HD IF LB MD COLOMBIA: More Taxes On The Poorest(2-E)

At present, deductions are made from the full tariff when the contributing company makes donations to non-profit organisations, promotes culture or sport, or supports reforestation, and also when it invests in scientific research, environmental improvement, fixed real assets, film projects, or employs workers with physical disabilities.

“They will also eliminate a remittance tax, paid only by transnational corporations when they take their profits out of Colombia. So we are in the monstrous situation where food and public services will be taxed, while tax breaks are given to the richest people in Colombia and the world, because we must be aware that Colombia is becoming ever more the property of the world’s rich,” said Robledo.

He was referring to the entry of foreign capital for the purchase of banks and public and private companies sold during Uribe’s administration, such as the national telecommunications company and Banco Granahorrar.

The “structural reform” comes at a time when, although growth of the gross domestic product has been rising (it grew by 3.9 percent in 2003, 4.8 percent in 2004 and 5.1 percent in 2005), “the results could have been better. Neighbouring countries had six percent growth,” economist Bonilla said.

“The international price of oil, the increases in the price of coffee, coal and ferro-nickel all favoured economic expansion. The Bank of the Republic maintained an expansionist policy, all of which favoured growth, so our results could have been similar to those of Chile and Argentina,” Bonilla said.

The opportunity provided by global economic circumstances was missed, added Bonilla, but even more seriously, positive factors, such as Colombia’s oil reserves, could run out in five years or less if no new oil deposits are found.

“If economic policy is based on inequality, and growth does not go hand-in-hand with redistribution measures, poverty will not decrease significantly,” the economist concluded.

In the introduction, Bonilla’s research report, states the premise that “if well-being is the happiness that derives from the choices made by individuals as free agents, the economy should be at the service of happiness.”

But what serves the happiness of some is not the same as what does so for others. “The government states that the impact of the reform will be neutral, that the total amount of revenue will neither increase nor decrease. But if it is expecting a contribution of 4,200 billion pesos (1.68 billion dollars) from VAT, and the end result is neutral, it’s clear that the tax burden added to the poor is being discounted from the rich,” senator Robledo concluded.