Colombia legislation would tax the rich to fight extreme poverty and pay off pandemic debt

Apr 18, 2021 | 14 comments

A poor neighborhood in Medellin. The rate of extreme poverty in Colombia has soared as a result of the Covid pandemic and the influx of Venezuelan refugees.

By Oscar Medina and Ezra Fieser

Colombia is trying to ramp up taxes on its richest citizens to tackle the ballooning deficits and mass poverty caused by lockdowns and the pandemic. The country is also grappling with a flood of Venezuelan refugees that totals an estimated 1.25 million.

Highrises in the Bogota business district. The divide between the rich and poor in Colombia is the most extreme in Latin America.

The wealthiest Colombians face increased taxes on salaries, dividends and assets, as well as a one-time “solidarity tax” on high incomes, in a bill due to be sent to congress on Thursday. At the same time, the bill would attempt to cut poverty and extreme poverty, by making direct cash payments to the poorest households.

Colombia’s economy suffered the deepest crash in its history last year, leaving millions no longer able to afford three meals per day, according to the national statistics agency. The widening fiscal deficit, expected to reach a record of 8.6% of gross domestic product this year, may cost the country its investment grade credit rating.

Sponsored ad

The new legislation, proposed by the country’s conservative government, aims to raise the equivalent of 2.2% of gross domestic product per year through new taxes and spending curbs, about 25 trillion pesos ($6.9 billion). It will be sent to congress this week and is subject to revisions by lawmakers before becoming law.

Colombian assets rallied after a draft was published by the local media Thursday morning. Local-currency government bonds maturing in 2030 rose to 108 cents on the dollar, the highest level in a week, and the peso also strengthened.

Wealth Tax
Colombia’s tax burden currently ranks near the bottom compared to peers. It collected about 20% of GDP in 2019, putting it ahead of only Mexico among the 37 members of the Organization for Economic Co-operation and Development.

Among the legislative provisions, the proposal would impose a one-time levy on monthly salaries that exceed 10 million pesos ($2,700 per month), between July and December. It includes a wealth tax of 1% on net assets above $1.3 million, rising to 2% on fortunes that exceed $4 million, while the highest tax on dividends would rise to 15%, from 10%.

It would also raise the highest marginal income tax rate to 41%, from 39%, as well as increase the number of middle class payers by lowering the threshold at which salaries are taxed. That would help fund a payment of 80,000 pesos ($22) per month for poor single-person households, rising to as much as 366,000 pesos ($101) for families of six in extreme poverty.

Foreign Investors
Other measures in the bill include a carbon tax on all fossil fuels, and a tax on single-use plastics, according to a copy of the text seen by Bloomberg.

While wealthy and middle class Colombians would see their taxes go up under the bill, a 5% levy on foreign holders of local peso bonds would be eliminated. The bill would set a limit for the primary fiscal deficit of 1.8% of GDP in 2022, falling to 0.2% by 2024.

Fitch Ratings downgraded Colombia’s credit rating last year, joining S&P Global Ratings in giving a BBB- grade, just one notch above junk. Moody’s Investors Service classifies the country at Baa2, two steps above speculative grade and also with a negative outlook.
____________________

Credit: Bloomberg

Subscribe to our newsletter

Cuenca High Life offers on-line publications, local translated news, and reports about the expat life and living in Ecuador. 

You have Successfully Subscribed!

Subscribe to our Newsletter

Subscribe to our Newsletter

CuencaHighLife publishes Ecuador news daily. Subscribing will guarentee that you never miss the most important news.

You have Successfully Subscribed!