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Updated:8/4/04
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Do Wealthy Colombians Pay Their Taxes? By Kate
Calligaro, CIP intern and Adam Isacson, Senior Associate The U.S. Congress is debating a Bush Administration proposal to double the number of military personnel who can be in Colombia at any given time. In 2005, as Plan Colombia gives way to some still undefined follow-up aid package, we are likely to see debate over proposals to expand the scope of U.S. aid (which has totaled US$3.2 billon over the past five years, 80 percent of it military and police aid).[1] The idea of expanding U.S. involvement in Colombia’s conflict continues to make many Americans – and many members of Congress – uncomfortable. In addition to concerns about human rights and “mission creep,” many are angered by the idea that U.S. troops and dollars are bailing out the wealthiest Colombians, a business and landowning class that has a history of making few sacrifices either for their country’s war effort or for poverty alleviation. Rep. Gene Taylor (D-Mississippi) expressed a common sentiment in May 2002.
Colombia’s elite also has its U.S. defenders. Brian Sheridan, a Clinton Administration Pentagon official who was a key architect of Plan Colombia, said this during the 2000 debate over the U.S. contribution to Plan Colombia.
In its own advocacy for more military aid and more U.S. personnel in Colombia, the U.S. Southern Command seeks to make the case that wealthy Colombians, led by President Álvaro Uribe’s efforts to mobilize resources for the war, have “seen the light” and are now contributing more. “Govt of Colombia Collects More Taxes,” Southcom announces in the latest of a series of “Colombia Progress Info Sheets” distributed to Congress. Which side is right? Are wealthy Colombians now giving their fair share? Colombia needs money, and a small group has most of it
On paper, Colombia is not among the world’s poorest countries. Its per capita income of US$1,820 per year is well above the developing-country average of US$1,170.[4] Yet, as Colombia’s Comptroller-General found in a devastating July 2004 report on the country’s social policy, nearly two-thirds of Colombians (64.3 percent) live below the poverty line of roughly three dollars per day. In rural areas, the poverty rate climbs to a shocking 85.3 percent.[5] What pushes up per-capita income levels is the fact that the richest Colombians are quite wealthy. The Comptroller reports that Colombia is now third most unequal country in Latin America, the world’s most unequal region. The wealthiest 10 percent of Colombians earned 80.27 times more than the poorest 10 percent in 2003.[6] (In the United States, the UN Development Program found that the top 10 percent earned 15.9 times more than the poorest 10 percent in 2000.[7]) Landholding statistics reveal a starker inequality: a Colombian government study released in March 2004 found that 0.4 percent of landholders – 15,273 holdings – account for 61.2 percent of registered agricultural land. 97 percent – 3.5 million landholders – share only 24.2 percent.[8] The reality behind these statistics is that a small group controls the majority of the national wealth. As such, they are the only possible source for the massive resources Colombia needs to recover territory from armed groups, create a functioning state, demobilize combatants, reduce dependence on US aid, and address the pervasive poverty and unemployment that sends so many people into the guerrillas, the paramilitaries and the drug economy. Colombia’s elite has improved, but still pays too few taxes. Despite Colombia’s serious needs, its people do not have a tradition of paying taxes: the country’s tax collection rates have been among the world’s lowest. According to the World Bank, Colombia collected 8.8 percent of GDP as taxes in 1990, a figure that had increased to 10.1 percent by 1998 – significantly lower than the United States (18.0 and 20.4 percent, respectively) and most of the developing world.[9] Taxation failed to keep up with an increase in social spending mandated by Colombia’s 1991 Constitution; after decades of balancing its budget, deficits exploded during the 1990s. Today Colombia’s central government deficit is more than 5 percent of the economy, and stagnant tax revenue is a key reason.[10] Some progress has been made, though. Tax revenue climbed to 13.3 percent of GDP by 2002.[11] Total tax collection rose in 2003 to 32.2 trillion pesos, or 14.4 percent, thanks in large part to a one-time asset tax (the “Democratic Security” wealth tax decreed in August 2002) that President Uribe collected from the wealthiest.[12] The proceeds of that assessment, which has not been repeated, totaled about US$900 million and went almost entirely to the Defense Ministry.[13] Tax revenue estimates for 2004 are optimistic, with Colombia’s government expecting to cross the 15 percent of GDP threshold for the first time. Increased revenues have probably benefited defense more than social needs. Increased tax collection has not brought any dramatic increase in anti-poverty programs or efforts to improve the capacities of the judiciary, the education system or the road network. Government social investment has held steady at about 14 percent of GDP since the late 1990s.[14] This means that social spending is increasing only as fast as the economy has been growing. Colombia’s economy grew by 3.7 percent last year, only the second out of the past five years in which economic growth exceeded population growth.[15] Though tax collection may be increasing as a share of the economy, social investment is not (nor is it shrinking). Instead, the Uribe government has used much new tax revenue for its stepped-up military offensive against guerrilla groups. The share of the economy going to the Defense Ministry, which includes both military and police, has risen sharply from 3.5 percent of GDP in 2002 to nearly 5 percent in 2003 and 2004.[16] The increased defense share has prompted many observers to charge that Uribe is neglecting the country’s urgent social needs. In a July interview that shocked Colombia’s political class, former president Andrés Pastrana accused Uribe of focusing “only on the military solution, abandoning social investment and other areas like justice.”[17]
The tax system remains quite regressive. Some of the increased tax revenue that made more defense spending possible has come from levies on the richest Colombians’ income. But the Bogotá government continues to rely heavily on regressive taxes which, since they charge the same rate regardless of income, are a more painful burden for the poor and the middle class. The U.S. Federal Government collects fully 88.6 percent of its revenues from income taxes, which charge a higher rate to higher-income taxpayers. Though a similarly progressive tax system would seem to make sense in a country with such poor income distribution, only 41.6 percent of Colombia’s national revenue (excluding profits from state-owned enterprises) comes from income taxes. Instead, a regressive national sales tax (or VAT, for “value-added tax”) contributes 42.2 percent.[18] President Uribe has implemented and proposed changes: some positive, some less so. In his effort to raise more revenue, President Uribe has pushed through some progressive measures that have required the rich to contribute more. The December 2003 law put a 10% surcharge on the income tax, which only the wealthiest Colombians pay. The one-time “Democratic Security” tax mentioned above, and a 0.3 percent tax on assets over 3 billion pesos (about $1.2 million) passed last December, have forced the rich to contribute. The first tax has already expired, however, and the second will end in 2006.[19] Uribe has sought to limit tax evasion in a country where 30 percent of all potential tax revenue never gets collected.[20] Some results have been achieved; the Economist Intelligence Unit reports that “improved enforcement of measures to combat tax evasion produced 624.2 billion pesos (US$232 million) in overdue taxes in January-April 2004, which is almost a third of the total estimated recoverable overdue tax payments.”[21] In July 2004 Uribe proposed two regressive measures: a tax on pensions – a government transfer to citizens, not an income source – and a 4 percent increase in the national sales tax or VAT. Uribe seeks to expand the VAT to basic necessities like food (but not education and health expenses), a change that would hit the poorest quite hard. Uribe supports the VAT increase because the government has already “taxed assets, increased the income tax and pensions. The VAT creates discipline, helps control evasion, and those who pay taxes elevate their sense of belonging to the state.”[22] Opponents have pointed out that a 4 percent VAT on basic goods would cost about 75 cents per person per month – no small amount when one is getting by on less than $2 per day.[23] Conclusions and recommendations As members of Congress decide whether to get more deeply involved in Colombia, they can draw two conclusions from this picture about the Colombian elite’s willingness to contribute. To the question, “Are wealthy Colombians paying more?” the answer is “Yes.” To the question, “Are they paying enough?” the answer is an emphatic “No.” “As the new government of President Alvaro Uribe Vélez implements cuts in social spending while increasing military spending and introducing regressive tax measures,” the British humanitarian group Christian Aid observes, “there is growing concern that the government is failing to address the needs of the poor.”[24] A country at war, with two of three living in poverty and a very weak state, will require much more investment in social needs to find a solution – and that will call for a great deal of new resources. Some of those resources will come from foreign donors – but Colombia is a big country where even the $750 million per year given by the United States ($600 million of it military and police aid, almost none of it in cash) add up to less than 1 percent of GDP. Some resources can be generated by economic growth – but growth has been modest even when it manages to exceed the country’s 1.7 percent annual rate of population increase.[25] That leaves Colombia’s small wealthy minority as the most promising source of resources. The Colombian government has begun to tap this resource, but must do more. No other choices exist. 1. Collect more progressive taxes. Instead of relying on sales taxes, the government can raise more for its territorial recovery and state-strengthening efforts by increasing the top income tax bracket and collecting income taxes from a larger sampling of Colombians. Of Colombia’s population of 44 million, only 800,000 pay any income taxes.[26] (Finance Minister Alberto Carrasquilla has noted that Colombia has one of the smallest tax bases in Latin America.[27]) Colombia’s wealthiest make up most of this amount, and a higher rate for top income levels would raise revenue quickly. One solution is to lower the minimum level that qualifies for income tax. Currently, only those who earn 60 million pesos (US$24,000) per year – 13 times per capita income – are subject to income tax. [28] Lowering this minimum would include more of the upper middle class, preferably at a lower rate. 2. Collect property taxes in rural areas. The Colombian government can raise significantly more funds by adopting the Council on Foreign Relations’ recommendation to restore the central government’s power to collect property taxes. The 1991 Constitution gave this power to municipalities, which have mostly proven to be too weak to stand up to deadbeat large landholders. CFR suggests that land taxes should be federalized and harshly enforced to extract money from a sector of the Colombian economy that is often very unproductive.[29] 3. Make good on promises to stop evasion. Though progress has been made, there is still much work to be done. It is estimated that 2.25 trillion pesos ($883 million) in overdue tax payments are unpaid, and this does not include unreported income.[30] The December 2003 law implements harsher punishments such as jail sentences as punishment for evasion and decreases the number of exemptions allowed in the tax code. These should be fully implemented. 4.
To reduce unwillingness to pay taxes, step up efforts against corruption
and inefficiency. Colombia loses a great deal to corruption. A
2003 study led by the vice-president’s office found that the state
loses over 2 percent of GDP to corruption each year.[31] Meanwhile, over-hiring, redundancy of services,
high overhead costs, and poor coordination between agencies – common
traits of bureaucracies everywhere – further waste Colombia’s scarce
resources. One reason increased social spending in the 1990s failed
to reduce poverty, Colombia’s National Planning Department argues,
is that too much “went to pay more and higher salaries.”[32] Wealthy Colombians and the Bogotá government may object to a U.S. organization offering recommendations for their own fiscal policy. We nonetheless hope that they will view this as constructive advice for Colombia’s efforts in Washington. A real increase in the Colombian elite’s contribution to its war and peace effort will not only be good for Colombia. It would also do away with one of the most pervasive doubts about the consequences of U.S. assistance and involvement there. Whether more sacrifice is forthcoming, though, is far from certain. [1] For U.S. aid figures, go to http://ciponline.org/colombia/aidtable.htm. [2] For text of Rep. Taylor's comments, go to http://www.ciponline.org/colombia/02052319.htm [3] Transcript of House Armed Services Committee Hearing (Washington: March 3, 2000) <http://commdocs.house.gov/committees/security/has083000.000/has083000_0f.htm>. [4] The World Bank, World Development Indicators Database (Washington: World Bank, 2002) <http://devdata.worldbank.org/external/dgcomp.asp?rmdk=110&smdk=473880&w=0>. [5] Contraloría General de la República de Colombia, Evaluación de la política social 2003 (Bogotá: CGR, July 2004): 43 <http://www.contraloriagen.gov.co:8081/internet/html/publicaciones/detalles.jsp?id=81>. [6] Contraloría General, 48. [7] United Nations Development Program, Human Development Report 2004 (New York: UNDP, 2004): 188 <http://hdr.undp.org/reports/global/2004/>. [8] “En Colombia hay mucha tierra concentrada en pocas manos,” El Tiempo (Bogotá: March 19, 2004) <http://www.portafolio.com.co/port_secc_online/porta_econ_online/2004-03-19/ARTICULO-WEB-NOTA_INTERIOR_PORTA-1559772.html>. [9] The World Bank, World Development Report 2000/2001 (Washington: World Bank, 2000): 300 <http://www.worldbank.org/poverty/wdrpoverty/report/index.htm>. [10] Consejo Nacional de Política Económica y Social, Departamento Nacional de Planeación, Balance Macroeconómico para 2003 y Perspectivas para 2004 (Bogotá: DNP, January 26, 2004) <http://www.dnp.gov.co/ArchivosWeb/Conpes/3266.pdf>. [11]
Daniel W. Christman, John G. Heimann, and Julia E. Sweig, Council
on Foreign Relations, Andes 2020: A New Strategy for the Challenges
of Colombia and the Region (Washington: CFR, January 2004) <http://www.cfr.org/pub6640/julia_e_sweig_daniel_w_christman_john_g_heimann/ [12] Dan Molinski, “Colombia '03 Tax Collection COP32.2 Trillion, Just Under Goal,” Dow Jones (Bogotá: January 21, 2004) <http://story.news.yahoo.com/news?tmpl=story&u=/dowjones/20040120/bs_dowjones/200401201748001571>. [13] Contraloría General de la República, Segundo Informe: Impuesto para la Seguridad Democrática (Bogotá: CGR, July 23, 2003) <http://www.contraloriagen.gov.co/ofcomunic/html/boletin.asp?arch=172&fecha=28/7/03>. [14] “El Plan de Reactivación Social para el 2005 tendrá examen hoy en la Casa de Nariño,” El Tiempo (Bogotá: July 31, 2004) <http://eltiempo.terra.com.co/poli/2004-07-31/ARTICULO-WEB-_NOTA_INTERIOR-1753638.html>. “Presupuesto para el 2005 será de $90 billones,” Servicio de Noticias del Estado (SNE) (Bogotá: Presidencia de Colombia, July 24, 2004) <http://www.presidencia.gov.co/sne/2004/julio/23/21232004.htm>. “Presupuesto de 2005 es eminentemente social,” Servicio de Noticias del Estado (SNE) (Bogotá: Presidencia de Colombia, July 29, 2004) <http://www.presidencia.gov.co/sne/2004/julio/29/13292004.htm>. [15] Economist Intelligence Unit, Country Report: Colombia (London: EUI, July 2004): 5. [16] Government of Colombia, Departamento Nacional de Planeación, Consejo Nacional de Política Económica y Social, "Renovación de la Administración Pública : Gestión por Resultados y Reforma del Sistema Nacional de Evaluación," Documento CONPES 3294 (Bogotá: CONPES, June 28, 2004): 4 <http://www.dnp.gov.co/ArchivosWeb/Direccion_General/ Presentaciones/El_problema_fiscal_antecedentes_y_soluciones.pdf>. Dan Molinski, “Colombian Economist Wants More Military Spending – Report,” Dow Jones (Bogotá: January 29, 2004) <http://story.news.yahoo.com/news?tmpl=story&cid=808&ncid=808&e=20&u=/dowjones/20040129/bs_dowjones/200401291021001077>. [17] María Alejandra Villamizar, “’Prefiero quedarme solo que tener que comprar conciencias,’” El Espectador (Bogotá: July 19, 2004) <http://www.elespectador.com/2004/20040719/politica/nota4.htm>. [18] Table S–1, “Budget Totals,” White House Office of Management and Budget. <http://www.whitehouse.gov/omb/budget/fy2005/tables.html> [19] “Reforma Tributaria para el Año Gravable 2004,”
Ernst and Young News. (Colombia, December, 2003.) <http://www.ey.com/global/download.nsf/Colombia/ [20] Dan Molinski, “Colombian ’03 Tax Collection COP32.2 Trillion, Just Under Goal” Dow Jones Newswire (Bogotá: January 21, 2004) [21] Economist Intelligence Unit, Country Report: Colombia (London: EUI, July 2004): 18. [22] Álvaro Uribe Vélez, “Discurso del Presidente en la instalación de las sesiones ordinarias del Congreso de la Republica,” Servicio de Noticias del Estado (SNE) (Bogotá: Presidencia de Colombia, July 20, 2004) <http://www.presidencia.gov.co/sne/2004/julio/20/13202004.htm >. [23] Luis Noé Ochoa, “El paquete chileno,” El Tiempo (Bogotá: July 31, 2004) <http://eltiempo.terra.com.co/opinion/colopi_new/luisnoochoa/ARTICULO-WEB-_NOTA_INTERIOR-1753922.html>. [24] Written statement submitted by Christian Aid to the United Nations Economic and Social Council (Geneva, Switzerland: Office of the United Nations High Commissioner for Human Rights April 2, 2003) <http://www.unhchr.ch/Huridocda/Huridoca.nsf/(Symbol)/E.CN.4.2003.NGO.271.En?Opendocument> [25] Central Intelligence Agency, “Colombia,” The CIA World Factbook (Washington: CIA, 2004) <http://www.cia.gov/cia/publications/factbook/geos/co.html>. [26] Dan Molinski, “Colombian ’03 Tax Collection COP32.2 Trillion, Just Under Goal” Dow Jones Newswire (Bogotá: January 21, 2004) [27] La Republica: “Gobierno entrega balance ministerial.” (Bogóta: July 21, 2004) <http://www.la-republica.com.co/noticia.php?id_notiweb=16692&id_subseccion=72&template=noticia&fecha=2004-07-21_11:59pm> [28] Álvaro Uribe Vélez, “Gobierno actualiza tarifas de impuestos,” Servicio de Noticias del Estado (SNE) (Bogotá: Presidencia de Colombia, December 31, 2003)<http://www.presidencia.gov.co/cne/2003/diciembre/diciembre.htm>. [29] Council on Foreign Relations. [30] Economist Intelligence Unit, Country Report: Colombia (London: EUI, July 2004): 18. [31] “Editorial: Muchos discursos, pocos goles,” El Tiempo (Bogotá: August 26, 2003). [32] Departamento Nacional de Planeación, Plan Nacional de Desarrollo 2002-2006: Hacia un Estado Comunitario (Bogotá: DNP, 2002) <http://www.dnp.gov.co/ArchivosWeb/Direccion_General/Plan_Nacional_de_Desarrollo/Bases_Plan_Desarrollo.pdf>. |
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