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Colombia’s Petro pushes tax reform to fund ambitious social agenda

Colombia’s first left-wing government in modern history has targeted the country’s wealthiest residents and commodity exports in a tax proposal that represents a major shift for the traditionally conservative nation.

The proposed tax reform “shouldn’t be seen as a punishment or a sacrifice,” Gustavo Petro, the country’s new president, said in his inauguration address on Sunday, a day before he sent the bill to Congress. “It’s just a solidarity payment that someone of good fortune makes to a society that has enabled them to generate wealth.”

Some analysts described the proposed reforms as more pragmatic and less radical than feared when Petro was elected. However, they fear that the reform will not be enough to tackle the budget deficit while financing the ambitious social programs he promised during the campaign trial.

The bill, announced on the first day of Petro’s administration, aims to raise another $5.8 billion next year, about 1.7 percent of gross domestic product. It projects an average of 1.4 percent in annual new revenue for the next 10 years thereafter.

The proposal includes a tax increase for those earning more than $2,300 a month, Colombia’s top 2.4 percent, according to the Treasury Department. It would also introduce an annual wealth tax on savings and real estate over $630,000.

The bill sent to Congress includes a 10 percent tax on oil, coal and gold exports when their prices exceed an international benchmark of $48 per barrel for oil, $87 per tonne for coal and $400. per troy ounce of gold. The price of US crude is currently $94 a barrel, Colombian coal averages about $140 a ton, and the price of gold is about $1,700 an ounce.

Oil and coal are from Colombia top two exports, valued in 2019 at $12.9 billion and $4.8 billion, respectively, while gold exports totaled $1.6 billion. A dividend tax on foreign investors who own shares in Colombian companies would double from 10 percent to 20 percent.

The additional revenue streams are critical to financing the generational change the president has promised voters. During his campaign, Petro, a guerrilla fighter in his youth, pledged to stop opencast mining and new oil and gas exploration contracts, as well as a number of progressive reforms, such as funding universal health care and higher education and supporting large-scale land and pension reforms.

When his supporters, tens of thousands of whom took to the streets last year, quickly become enraged, initially to protest a tax reform proposal that would have increased VAT.

“As we say in Colombia, ‘campaigns are poetry, but government is prose’, and the economic and fiscal reality is complicated,” said Luis Fernando Mejía, director of Fedesarrollo, a Colombian economic think tank.

The proposal comes as Colombia’s economy faces headwinds. The budget deficit is expected to be close to 5.6 points of GDP this year and should be revised downwards by two points of GDP next year under the already existing fiscal rule. Prices are rising rapidly as the country emerges from the coronavirus pandemic — annual inflation is 10.2 percent, the highest since 1999, while nearly 40 percent of people live in monetary poverty.

“Part of this reform will be spent on reducing the budget deficit,” Mejía said. “Another part goes to spending, in line with the social programs discussed by the government.”

The country’s tax revenue is about 19 percent of GDP, but according to the OECD, only 5 percent of the population pays personal taxes. The average for the OECD countries is 33 percent.

Petro’s Yale-educated Treasury Secretary Jose Antonio Ocampo has pledged to tackle tax evasion and avoidance and says modernizing Colombia’s debt collection agency would boost revenues. It is estimated that more than half of the Colombian workforce works in the informal economy.

Despite the challenges, some economists said the reform bill could serve as a model for other progressive governments that have praised the proposed increase in capital gains tax.

“In Colombia, the truth is that we have never had a reform aimed at making the people with the highest wages pay,” said María Fernanda Valdés, economic affairs coordinator at Friedrich Ebert Stiftung, a political foundation. “Almost always attempts were made to make the middle class pay, for example through the [value added tax]. If successful, it could be the first of a wave of similar reforms in Latin America.”

The bill requires Congressional approval, where Petro has a majority coalition made up of both centrists from traditional parties and left-wing outsiders. It is likely to be amended by lawmakers.

Many of Colombia’s powerful business associations were yet to make formal statements about the proposed reforms on Wednesday. But certain provisions, such as a tax on sugary drinks, processed foods and single-use plastics, are likely to worry them.

Erica Fraga, senior analyst for Latin America and the Caribbean at the Economist Intelligence Unit, a think tank, said the presentation of a “reasonable” tax reform on Petro’s first day in office showed an effort to win quick victories in Congress.

“However, Mr Petro’s pragmatism will also force him to accept the dilution of his radical agenda,” leading to tensions between his left-wing allies and traditional parties, Fraga said. “The risk of political turbulence and social unrest when his honeymoon with both Congress and voters ends remains high.”

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