“The taxes will not be confiscatory, they will simply be fair, in a country that must recognize the enormous social inequality in which we live as an aberration,” said President Gustavo Petro in his inaugural speech on August 7. Less than 24 hours later, his finance minister, José Antonio Ocampo, presented a tax reform bill in the House of Representatives to land that speech. An ambitious project, which sought to collect an additional 26 billion pesos in 2023, equivalent to 1.8% of GDP, essentially charging more to people with higher incomes, to financial companies and the extractive sector, and to unhealthy or contrary products. ambient. And that it aimed to ensure fiscal stability and, at the same time, reduce poverty and inequality.
In the nearly three months of debate since then, the bill has undergone changes that have made headlines. But its essence remains, and it revolves around these five points:
1. The greatest collection will come from hydrocarbons
The biggest debate that remains open, and the biggest emphasis of the reform in terms of collecting money, is on hydrocarbons, and especially on oil. That center of gravity was already clear in the initial project, in which the government proposed to prohibit the payment of royalties, the money that is given to the State for extracting goods from the subsoil, which is state-owned, from being subtracted from the income tax. It also created a new tax of 10% on exports of crude oil, gold and coal when the value of these products exceeds a certain threshold, which today far exceeds. The logic holds.
The non-deductibility of royalties remained. It was strongly criticized in Congress, and outside of it, since all the costs and expenses that a company or person has to obtain their income are deducted from the income tax, and royalties are one of them. Ocampo defended it like this in the final plenary session of the Chamber this Thursday: “This issue was the subject of much debate with the third commissions, and we even had an alternative of a fixed surcharge,” he acknowledged, but defended the measure. He said that the Ministry calculated that this measure is equivalent to between 2% and 5% additional in the rental rate. Fedesarrollo, a reputable economic think tank, calculates a substantially higher impact, of 17.7%.
The reform not only increases the collection of hydrocarbons in this way. In addition to other relatively minor changes (such as the limitation of some tax benefits or the treatment given to the payment of other taxes), it creates a 35% income tax surcharge. For oil companies, that extra 5% when the average price for the year is 30% to 45% of the average of the previous 10 years, 10% when it is 45% to 60% and 15% when it is more tall. That is, they could pay a 50% fee. For coal, the surtax would reach 10%.
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These changes have at least two effects: that of leading the State to depend more on hydrocarbons to finance itself, and at the same time creating less incentive to invest in them. The latter is aligned with the objective of modifying the economic system to depend less on them and achieve the energy transition, but it may end up reducing the resources to finance it.
2. Send messages in defense of health and the environment
In addition to oil, the other great debate of the reform was on the so-called healthy taxes, which seek to discourage the consumption of foods that contribute little to nutrition and affect health due to their high content of sugar, sodium or fat.
One is the tax on sugary drinks, which the Government included and which has won a battle in opinion since it was first proposed in a reform in 2016. Congress approved it, although in a less strict version: it will be charged to beverages that have a higher sugar level than initially proposed, which leaves out several of the best-selling brands of Postobón and Coca-Cola, which thus manage to avoid most of their collection.
The other healthy tax is that of ultra-processed foods, those that have an industrial process in which sugar, salt or fats are added. Here the debate was initially marked by sausage, which was left out, and then by bread, which was also excluded. Thus, they will pay 10% in 2023, 15% in 2024 and 20% in 2025, foods such as sausages, cereals, cookies or chocolate that have more than 300 milligrams of sodium per 100 grams, or in which 10% or more of its calories come from free sugars or saturated fats. This nutritional tongue twister has landed in a debate about foods that many Colombians consume every day, such as yogurt, pasta or cakes.
The reform also underpins the defense of the environment, an issue that has been among Petro’s priorities for a quarter of a century. There will now be a tax on single-use plastics, such as disposable packaging, and the existing carbon tax will be higher.
3. It emphasizes equality, although it lost along the way
Petro’s inaugural speech, Ocampo’s words when filing the bill, and his explanatory document agree that the reform seeks to reduce inequality because it focuses on people with higher incomes. “This tax reform project aims to advance fundamentally in two dimensions. First, to reduce the inequitable exemptions enjoyed by natural persons with higher incomes”, says the explanatory memorandum.
However, along the way it lost several of the elements that highlighted this point the most, led by the elimination of the income tax on pensions of 10 million pesos or more due to pressure from the government benches that are not from the left and especially the conservative . They also changed elements such as the ceilings on the benefits that a person can discount, elements of the wealth tax or the income tax on dividends.
The possibility of a lower income tax rate for so-called mipymes (micro, small and medium-sized enterprises), such as have asked his union, several left-wing congressmen and as impulse Petro in 2021, when the last tax reform of the previous government was being processed. With votes from the opposition and parties allied with the Government but not Petristas, the plenary session of the Chamber approved a proposal by Jeniffer Pedraza, from the Dignidad party (the non-governmentist left) to include it, despite not having the government’s endorsement as required. of any norm that implies State spending. As the Senate did not approve it, the future of this idea depends on the reconciliation of the texts approved by the two plenary sessions, and leaves the Government in the dilemma between supporting a measure criticized by the technicians and that it does not support, or remaining as an enemy of this flag of popular economy and equality-
4. Contributes to the financing of the deficit
With an estimated collection of an additional 19 to 20 billion in 2023, the reform promises to reduce the fiscal deficit by around 1.2% of GDP. This is a relevant contribution that brings tax collection closer to the Latin American average, but it is far from being enough to close the fiscal deficit. The most recent calculations by the Fiscal Rule Committee, an autonomous group of economists in charge of monitoring the sustainability of public finances, indicate that in 2023 the deficit would be 7.3% of GDP. The initial proposal of the reform was to collect 1.78% of the GDP, about 26 billion pesos, but it had the usual process of tax increases to see its ambitions reduced in the process in Congress.
In addition, the same Committee warned about a potential negative impact of the reform on the fiscal deficit due to the effect of the tax hike, especially in the oil sector. “The high dependence on these transfers [impuestos y regalías del sector petrolero] for the Nation means that a policy that suspends activity or discourages investment in the sector represents a high risk for the fiscal and exchange rate sustainability of the country with adverse effects on development and economic growth”, writes the Committee in its most recent statement public last Sunday. Fedesarrollo, a renowned center of economic thought, studied the same impact of the reform and found that because of it “economic growth could be reduced by an average of 0.32 percentage points, with a maximum of 0.4 percentage points in 2030” and that It would discourage the oil industry so much that the collection would be reduced by 0.12% of GDP.
5. The discussion now turns to spending
With the reform already approved, the debate has already slipped towards what for, what the money will be spent on. President Gustavo Petro clarifies that the priorities are social spending: education, aqueducts, roads, support for single mothers. “There will be some environmental and peace programs and also for the promotion of small businesses, which in reality is also social spending. They are our basic objectives”, said Ocampo when presenting the reform project.
Since then, the estimated fiscal deficit has grown, as has the amount of pesos that the State needs to collect in taxes to pay its foreign debt, in dollars, on account of the devaluation. According to data from the Ministry of Finance, between July 31 and September 30, this debt grew from 315.1 billion pesos to 332.5 billion pesos, a greater increase than the one that plans to collect all the tax in 2023.
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