Reforming Colombia’s Tax Code Roberto Steiner Fedesarrollo Colombia Inside Out New York, May 11, 2015 Agenda: 12:15 12:45 Reforming Colombia’s Tax Code Speaker: Roberto Steiner – Research Associate Fedesarrollo Colombia has a sound macroeconomic policy framework • Inflation targeting regime with a floating exchange rate - Low pass-through from the exchange rate to inflation - Low balance sheet effects: private and public foreign debt is low, no direct currency mismatches in the banking sector - - Central Governement foreign debt at 26% of total debt, less than 10% of GDP Non-financial private firms either “naturally” or “financially” hedged • As a result, the exchange rate can carry most of the burden of adjustment to financial and TOT shocks: the ideal arrangement for a small open economy Strong Commitment to Fiscal Sustainability • Gross public debt hovers around 43% of GDP • The primary fiscal deficit has not surpassed 0.1% of GDP since 2010 • In 2011 a fiscal rule was introduced and has been complied with • However, the decline in oil prices is a major challenge: – Non-oil tax revenues need to be enhanced by close to 2% of GDP – This offers a good opportunity to make important changes to the tax code (the black sheep of the macro framework) Colombia´s tax code does not meet any of the criteria of a good tax structure • It is quite inefficient, not raising enough revenue • It is not progressive; i.e. it does little to improve income distribution • It is highly distortionary of incentives phased by economic agents – In particular, it compromises the ability of private business to compete in the global economy Low tax collections 30 24,1 25 22,1 21,4 21,7 21,8 % of GDP 20 18 15,9 16,1 16,2 15 13,2 13,2 13,4 13,6 13,7 14,6 14,7 14,7 11,9 10 5 0 2011-2013 average Source: OECD 18,4 18,4 19 25 25,1 Even after controlling for per capita income Source: OECD, World Bank In spite of having reasonably high marginal tax rates Country Corporate income tax rate VAT ‘s General Rate Japan 36 8 Colombia 34* 16 Venezuela 34 12 Mexico 30 16 Nicaragua 30 15 Paraguay 30 10 Costa Rica 30 13 New Zealand 28 15 Bolivia 25 15 Chile 22.5 19 Switzerland 28 8 *The corporate income tax rate has two components: 25% as CI and 9% as CREE, the later applied to an income definition that better approximates profits. Exemptions are prominent as evidenced by VAT´s low C-efficiency (tax collections/consumption) Source: Gómez & Steiner 2014 Country C-efficiency Norway 0.76 Czech Republic 0.69 Finland 0.68 Chile 0.67 Canada 0.65 Belgium 0.64 Uruguay 0.64 Colombia 0.56 Mexico 0.35 And the portion of personal income that is exempt from paying income tax is huge 3,1 2,2 1,5 1 0,5 0,5 OECC Mexico Chile Argentina Peru Multiple of average household income at which household income is taxed Colombia Taxes are not particularly progressive: after accounting for taxes & social transfers, the Gini coefficient does not improve significantly Source: Ministry of Finance Income taxes are paid by corporations, not by individuals: this deters from improving income distribution while negatively affecting business competitiveness Source: OECD Effective tax rates on firms are the highest in the “Alianza del Pacífico” Country Effective Tax Rate Colombia 52.5 Mexico 43.3 Peru 40.4 Chile 30.2 Source: Gómez & Steiner 2014 And are particularly high for mid-size firms Firm’s size Effective Tax Rate Small 49.6 Medium 56.9 Large 51 Source: Gómez & Steiner 2014 The road ahead • Enhance tax collections by around 2% of GDP • VAT - Increase general rate from 16 to 17% Remove all exemptions other than for purchases of capital goods and some selected consumer items • Do away with the wealth tax on corporations and phase-out the wealth tax on individuals • Re-balance income taxes - Unify corporate tax rates (CREE is better than CI) Reduce the (unified) corporate tax rate from 34 to 32% Ensure that non-profit institutions are truly not-for-profit Reduce the level of non-taxable personal income by half Tax dividends Tax pensions beyond a certain level Lunch and Networking: 12: 45 – 13:45