On Income and Wealth in the Tax Reform in Colombia.

The tax reform that the Congress of the Republic is currently studying and debating, according to its explanatory statement, is focused on an additional collection from the government towards transfer programs for low-income households that allow their consumption to increase permanent, with important effects on their well-being.

They also add that the reform generates sufficient resources to promote social programs and productive development by the government, which allow improving income distribution, and the consumption of lower-income households through transfer programs that increase their purchasing power, improving their well-being in a scenario without reform.

The measures included (they affirm in the text) in the reform enable a potential spending space to implement proposals in favor of supporting the population in a condition of poverty and vulnerability in the country.

In 2.021, according to official sources of information, extreme monetary poverty (also known as indigence) which measures the percentage of the population that does not have enough income to access a minimum of food that allows them to lead a healthy life, stood at 12.2% equivalent to 6.1 million people, 2.8 million less than those registered in 2.020 during the pandemic, but 1.4 million higher than the 2.019 record.

In 2.021, monetary poverty, a broader concept that includes the aforementioned extreme monetary poverty, stood at 39.3%, almost 20 million people, which was reduced compared to 2.020 by 3.2% but is still above the levels from 2.019 at 3.6%.

According to official estimates, with the tax reform extreme monetary poverty would be reduced by 4% and monetary poverty by 3.9%.

Income inequality in Colombia has been characterized by being high and persistent, the Gini coefficient has been systematically above 0.50, a figure that places the country among the 10% most unequal countries in the world. Unlike other countries, fiscal policy in Colombia has not contributed to reducing these high levels of inequality. According to OECD figures, in 2.021 the Colombian Gini coefficient was reduced from 0.543 to 0.514 after taxes and transfers, it is one of the smallest reductions within the OECD countries.

If the current tax reform, which allows additional collection, were applied, according to the official source, the Gini would drop from 0.543 in 2.021 to 0.491 (with the corresponding taxes and transfers), which would represent the maximum decrease in that indicator since the date of existence records, according to the explanatory statement.

With all of the above, some observations are as follows. The tax reform that proposes collecting 26 billion pesos in taxes, manages to reduce poverty and inequality to the following levels: extreme poverty 8.2% and monetary poverty 35.4% and with a Gini coefficient of 0.491.

The previous levels achieved with the reform in extreme poverty are above Latin American countries such as Costa Rica (6.3%), Peru (4.1%) and Paraguay (3.9%) and in monetary poverty they exceed Ecuador (27.7%), Paraguay (26.9%), Peru (25.9%) and Costa Rica (23.0%). In inequality, this gini coefficient exceeds several Latin American countries.

The results are also far from the levels according to the International Organizations of monetary poverty such as those of Europe and the United States (between 15% and 25%) and inequality (average 0.35 in the Gini coefficient).

Simple calculations suggest that several tax reforms such as the current one are necessary within a period of 10 years to improve Colombia's levels to world levels. Without other tax reforms, it is unlikely to approach the levels of other Latin American countries and even more so in Europe or the United States. Or it could also be achieved with tax reforms that collect collections above the reform that is going to be approved, for example 35 or 40 billion pesos, which would imply opening other steps in the rates of collection of income and wealth tax to natural persons of the highest levels of the pyramid.

In the latter case, opening new tiers in rates could be as set out below. In the income tax in the current table, three income steps could be included for 30, 35 and 40 million pesos monthly with their respective rates, as well as include another 5 steps of 60, 70, 80, 90, 100 and 120 million monthly and others two more for 160 and 180 million monthly. Additionally, the steps that appear in the table with 20 and 25 million monthly may have the rate that appears in said table increased by one or two percentage points. Several sources of information and researchers affirm that in Colombia only a few citizens would be affected, calculations indicate 65,000 Colombians with incomes greater than 33 million monthly and within these 25,000 with incomes greater than 80 million.

Also according to international studies (by the Swiss bank Credit Suisse and Forbes) and publications of specialized newspapers, Colombia, with a population of 50 million inhabitants, has a composition in the highest assets described as follows. There are only 39.500 people with wealth valued at more than 4.200 million pesos (one million dollars at an exchange rate of 4.200 per dollar). Of them, 166 have more than 50 million dollars, equivalent to 210.000 million pesos, of which 16 individuals have assets that reach 500 million dollars, equivalent to 2.2 million million pesos, in turn, 5 have more than 1.000 million dollars, equivalent to 4.2 million million pesos, of which there is only one with more than 8.000 million dollars, equivalent to 33.6 million million pesos.

In addition, in the current table of the tax reform there are only two rates for two ranges of assets that are: between 3.000 and 5.000 million pesos pay 0.5% and those over 5.000 million pay 1%. But as it was presented before, there are assets that can be taxed by establishing several more steps than those proposed in the reform. They could include tiers for net worth of $10 billion, $50 billion, $100 billion, $200 billion and so on up to the highest. Thus, a patrimony of 200.000 million pesos that was taxed at a rate of 4%, would have to pay a tax of 8.000 million more than what it pays with the current reform of 2.000 million.

The previous illustration elaborated with a greater progressiveness in the ranges of both income tax and wealth tax than that contained in the current tax reform (proposed for consideration by Congress) is an alternative aimed at collecting more taxes and lowering poverty levels and inequality to a greater extent than those proposed in the aforementioned reform. Levels of poverty and inequality that are going to be achieved with the current reform, which are 35.4% in monetary poverty and 0.491 in the Gini coefficient, are still far from others presented by Latin American countries and even more so by Europe and the United States.

An acceleration in the economic development of Colombia that allows it to go from being cataloged (already for several decades) as a developing country to being an emerging developed country, goes through reducing those levels of poverty and inequality towards other world levels of countries that were mentioned above.

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Today (tuesday 16) regarding world markets, stock markets are growing in Europe and mixed in the United States, due to optimism and caution about world demand due to the slowdown in China.

The price of oil falls due to a possible lower global demand. The WTI and the BRENT are trading at 88.9 and 94.4 dollars per barrel respectively.

In Colombia, the Stock Exchange rises 0.4% at mid-morning and the peso that began the day with appreciation at 4.166 per dollar, is trading at 4.219 with devaluation compared to the TRM for today of 4.185.