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Colombia: High Taxes Incentivize Black Market and Informal Economy

By: Felipe Fernández - @Ffernandezp - Jun 12, 2017, 2:08 pm
High taxes on financial transactions expand the informal economy in Colombia (
High taxes on financial transactions expand the informal economy in Colombia (Twitter).

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In Colombia the size of the underground, or black market, economy continues to grow despite attempts by authorities to control it.

The size of this type of economy, which includes varying degrees of illegality and informality, amounts to USD $104 billion per year, or 35% of the country’s GDP in 2017.

According to the National Association of Financial Institutions (Anif), in 2007, the size of the underground economy represented 40% of GDP; the trend over the last 20 years has not been favorable to the country.

The phenomenon of informality, present in this type of economy permeates most of the underground economic activity. Such cash transactions are estimated to represent nearly USD $100 billion, thus exceeding the current Colombian national budget.

Evading taxes is perhaps the biggest reason for this state of affairs: in this fashion companies or businesses can avoid taxes, contributions to social security and pensions, and do not even registered with tax authorities.

“Among the three main causes of the underground economy in Colombia, labor informality affects 64% of the economically active population, and that 54% of all small business owners,” the study said.

Street commerce is one of the faces of informality; indeed, some experts estimate that, in the city of Bogota, simple street vending businesses generate a daily income of USD $650,000.

According to the Monitoring Report of Territories Affected by Unlawful Crops of 2015, coca production in the country expanded from 442 tons to 646 tons during the years 2014-2015, the research indicates.

“Tax evasion rates are close to 25%, and drug trafficking has increased recently, although this showed a reduction between 2000 and 2014.”

In total, illicit crops had decreased from 1.7% of GDP in 2000 to 0.3% of GDP in 2014.

The study points out that these actions are invisible to the state regulatory authorities. Such businesses move large amounts of cash, intending to avoid the strong financial controls in Colombian territory. The so-called “cuatro por mil”, which taxes all financial transactions through official channels at 0.4%, is a further disincentive to participate in the formal economy.

“In Colombia, available figures indicate that about 90% of transactions are made in cash, mainly, to avoid paying the tax on financial transactions. Also 63% of people’s savings are held in cash,” says the research.

The Anif guild is one that does not hesitate to call for the repeal of the cuatro por mil tax, saying that it has harmful effects on the economy.

Comparing Colombia to its counterparts in the Pacific Alliance, we have the following picture. The Anif study takes the figures from a decade ago (2007), due to the low availability of data. For that year “the underground economy in Colombia amounted to values of 39.8% of GDP (33.5% informal plus 6.3% illegal).”

This means that Colombia is similar to Mexico, with an underground economy size of 39.7% of GDP, although with less informality than illegality (28.8% informal plus 10.9% illegal). It is worth noting that the research revealed that Peru recorded even higher levels, with an underground economy that represented 59.6% of GDP. In this country, informality surpassed that of Colombia as a percentage of GDP (53.7%), while illegality is lower (5.9%).

However, the country that stands out in the region is Chile, the underground economy in that country is 18.7% of GDP, driven mostly by informality (18.5% of GDP) and only 0.2% linked to illegality.

Source: El Tiempo

Felipe Fernández Felipe Fernández

Felipe Fernández is a reporter from Colombia for the PanAm Post. He's a law student at the La Gran Colombia University in Armenia. Follow him on Twitter: @Ffernandezp

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