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No, Raising Taxes in Colombia Will Not Help the Country’s Poor

By: Vanesa Vallejo - Nov 1, 2016, 4:58 pm
The common (and untruthful) argument is that the tax reform passing through Congress will allow low-income Colombians to access programs for free housing, health and education (Flickr)
The common argument for more taxes in Colombia is that low-income people will access programs for free housing, health, and education. (Flickr)

EspañolColombian President Juan Manuel Santos has emphasized ad nauseum that though the tax reform is painful, it is inevitable if social programs benefiting the poorest citizens are to be maintained.

In an interview with the newspaper El Tiempo, Finance Minister Mauricio Cardenas said: “If we do nothing, we risk regressing. You have to keep investing in schools, hospitals, infrastructure. I know it’s difficult … But it is absolutely necessary.”

He warned the public that the fundamental objective of the tax reform is to sustain investment and social spending.

Tax reform pending in Congress will supposedly allow low-income Colombians to maintain access to free housing programs, health, education and other state aids. However, it is worth asking whether resources of the reform will have the altruistic aim that government officials skillfully highlighted when talking about the tax hike.

To examine what the fate of this additional money, you have to analyze the distribution of the Colombian state budget: contrary to what officials claim, these resources are not primarily used in subsidies or investment for the poorest, but are rather directed toward financing parts of the national budget, which is, as we shall see, anything but philanthropic.

The Colombian state budget for 2017, recently approved in Congress, reached $224 trillion pesos (US $74 billion). The government expects a significant portion of this to be financed by new resources from the tax reform, especially the three-point increase in VAT and the reduction of the minimum income for a person subject to income taxes.

Of the national budget, 24 percent (or about USD $ 18 billion) are used to service the public debt, while 17 percent (or about USD $12 billion) will cover the sustainability of the pension system. Fifteen percent (or US $11 billion) will cover the payroll of state agencies. So with a barely cursory glance, it’s clear that more than half of the budget has nothing to do with social investment or aid to the poor; on the contrary, it is intended to maintain the privileged bureaucratic caste or pay overspending decided upon in the past.

As for the resources with which the state finances the pension system, one of the most important components of the budget, many may say, is for the poorest income bracket. However, only 0.3 percent of total pension funds are given to the poorest 20 percent of Colombians, while the richest 20 percent receive 63 percent of the subsidies.

But even among the items that the government presents as “social investment,” distribution is not favorable for low-income citizens. Director of the National Planning Department Simon Gaviria said the idea that Colombia prioritizes resources to the poorest people has nothing to do with reality. According to a report, 20 percent of state subsidies end up in the hands of the richest fifth of the population and only 22 percent reaches the lowest income quintile. The bulk of the subsidies goes to the middle class.

Minister Cardenas should explain to Colombians that their taxes and, of course, the increase they will have to pay next year, will prioritize not to help the poorest, but to pay interest on the public debt that politicians have irresponsibly inflated for decades. Too much of this new collection will go to subsidize pensioners, but not those who earn a minimum wage.

No, Mr. Cardenas. No, President Santos: what is gained with the tax reform is not relief for the poorest. Instead the increase will be used to grown an elephantine state growing past infinity.

Vanesa Vallejo Vanesa Vallejo

Vanesa Vallejo is a Colombian economist, columnist, and classical liberal activist. She is a member of Colombia's Libertarian Movement. Follow her: @VanesaVallejo3.