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Reforming Colombia’s Tax Code
Roberto Steiner
Fedesarrollo
Colombia Inside Out
New York, May 11, 2015
Agenda:
12:15 12:45 Reforming Colombia’s Tax Code
Speaker:
Roberto Steiner – Research Associate Fedesarrollo
Colombia has a sound macroeconomic
policy framework
• Inflation targeting regime with a floating exchange rate
- Low pass-through from the exchange rate to inflation
- Low balance sheet effects: private and public foreign debt is
low, no direct currency mismatches in the banking sector
-
-
Central Governement foreign debt at 26% of total debt, less than 10%
of GDP
Non-financial private firms either “naturally” or “financially” hedged
• As a result, the exchange rate can carry most of the
burden of adjustment to financial and TOT shocks: the
ideal arrangement for a small open economy
Strong Commitment to Fiscal Sustainability
• Gross public debt hovers around 43% of GDP
• The primary fiscal deficit has not surpassed 0.1% of GDP
since 2010
• In 2011 a fiscal rule was introduced and has been complied
with
• However, the decline in oil prices is a major challenge:
– Non-oil tax revenues need to be enhanced by close to 2% of GDP
– This offers a good opportunity to make important changes to the tax
code (the black sheep of the macro framework)
Colombia´s tax code does not meet any of
the criteria of a good tax structure
• It is quite inefficient, not raising enough revenue
• It is not progressive; i.e. it does little to improve income
distribution
• It is highly distortionary of incentives phased by economic
agents
– In particular, it compromises the ability of private business
to compete in the global economy
Low tax collections
30
24,1
25
22,1
21,4 21,7 21,8
% of GDP
20
18
15,9 16,1 16,2
15
13,2 13,2 13,4 13,6 13,7
14,6 14,7 14,7
11,9
10
5
0
2011-2013 average
Source: OECD
18,4 18,4
19
25
25,1
Even after controlling for per capita income
Source: OECD, World Bank
In spite of having reasonably
high marginal tax rates
Country
Corporate income tax rate
VAT ‘s General Rate
Japan
36
8
Colombia
34*
16
Venezuela
34
12
Mexico
30
16
Nicaragua
30
15
Paraguay
30
10
Costa Rica
30
13
New Zealand
28
15
Bolivia
25
15
Chile
22.5
19
Switzerland
28
8
*The corporate income tax rate has two components: 25% as CI and 9% as CREE, the later applied to an income definition
that better approximates profits.
Exemptions are prominent as evidenced by VAT´s
low C-efficiency (tax collections/consumption)
Source: Gómez & Steiner 2014
Country
C-efficiency
Norway
0.76
Czech Republic
0.69
Finland
0.68
Chile
0.67
Canada
0.65
Belgium
0.64
Uruguay
0.64
Colombia
0.56
Mexico
0.35
And the portion of personal income that is exempt
from paying income tax is huge
3,1
2,2
1,5
1
0,5
0,5
OECC
Mexico
Chile
Argentina
Peru
Multiple of average household income at which household income is taxed
Colombia
Taxes are not particularly progressive: after accounting for taxes &
social transfers, the Gini coefficient does not improve significantly
Source: Ministry of Finance
Income taxes are paid by corporations, not by individuals: this
deters from improving income distribution while negatively affecting
business competitiveness
Source: OECD
Effective tax rates on firms are the highest in the
“Alianza del Pacífico”
Country
Effective Tax Rate
Colombia
52.5
Mexico
43.3
Peru
40.4
Chile
30.2
Source: Gómez & Steiner 2014
And are particularly high for
mid-size firms
Firm’s size
Effective Tax Rate
Small
49.6
Medium
56.9
Large
51
Source: Gómez & Steiner 2014
The road ahead
• Enhance tax collections by around 2% of GDP
• VAT
-
Increase general rate from 16 to 17%
Remove all exemptions other than for purchases of capital goods and
some selected consumer items
• Do away with the wealth tax on corporations and phase-out the
wealth tax on individuals
• Re-balance income taxes
-
Unify corporate tax rates (CREE is better than CI)
Reduce the (unified) corporate tax rate from 34 to 32%
Ensure that non-profit institutions are truly not-for-profit
Reduce the level of non-taxable personal income by half
Tax dividends
Tax pensions beyond a certain level
Lunch and Networking: 12: 45 – 13:45