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Tax structure, inefficient in reducing inequality in Colombia*

During the 2022 Hay Festival in Cartagena, French economist Thomas Piketty will provide a keynote address at the Auditorium of the Faculty of Economic Sciences of the Universidad Nacional de Colombia(UNal.) For the Colombian society,including the academic community, research centers, and policy-makers it is an important opportunity to listen to his reflections on taxation and inequality. It is also an opportunity to obtain information over the current debate of the Colombian fiscal system and its social structure.

 

Piketty, a professor of the Paris School for Advanced Studies in the Social Sciences, says, “the Colombian tax system is not very progressive according to international studies. The country needs a tax system with the highest level of transparency, favoring a flow of information necessary for analysis and auditing, and also something fundamental: Make the rich pay more taxes”.

 

The current article shows the result on the income distribution and wealth in Colombia of the National Tax and Customs Administration (DIAN, for its Spanish acronym) tax records as well as the Colombian Administrative Department of Statistics (DANE, for its Spanish acronym) Household Comprehensive Survey - GEIH.

 

Experts and researchers have spoken about the importance of measuring the concentration of income and wealth in tax administration records, given the possibility of contrasting the trustfulness of the information in tax returns as opposed to the case of the household surveys. 

Pro wealthy tax system


In Colombia, 1% and 0.1% of the wealthiest natural and legal entities are not represented in the GEIH sample. While, according to the survey, between 2016 and 2017 there were 91 households with monthly incomes over COP $100 million a month (around USD $ 25,000), with an average of 2.5 people per household, which would concentrate 0.04% of the total income. In the DIAN administrative records, 24,824 natural persons concentrate 23% of the total filed gross income.

 

Also, the survey shows 17 households with income greater than COP $200 million a month, contrasting with the 9,247 persons, according to DIAN records.

 

The wealthiest people are not represented in the GEIH resulting in an important difference in the Gini inequality coefficient: 0.5438 in the survey and 0.6159 in income tax returns filed with DIAN.

 

Analyzing tax administration records shows that 50% of natural people that file taxes with less income concentrate scarcely 16% of the total gross income, while 10% of the wealthiest people concentrate 51%; 1% concentrates 2%, and 0.1% concentrates 11%.

 

According to the latest 2014 National Agricultural Census (CNA, for its Spanish acronym), 74% of the agricultural productive units are in land plots of less than 5 hectares, while 0.4% in units of more than 500 hectares.

 

Regarding average income, 10% of the wealthiest natural persons have incomes 23 times 30% of the tax filers with less income; this proportion is 110 and 487 times respectively for 1% and 0.1% of the wealthiest natural persons in Colombia.

 

Furthermore, the most favored with tax benefits that erode the taxable income level (non-taxable income, exempt income, and tax discounts) are natural persons with the greatest income.

 

These preferential tax treatments –without the due social or economic justification, in most cases– lead to a very low effective tax rate (payable tax/gross income) for the wealthiest people in the country. In other words, the tax regime is characterized by a marked pro wealthy bias, especially pro superwealthy

 

Wealth Concentration 

 

According to the latest tax returns, the effective tax rate was 2.5% for the income of 3.5 million contributors, compared to 2.2% for the wealthiest 1%, and 1.6% for the wealthiest 0.1%, with the aggravating circumstance that the effective tax rate on work income is progressive up to 9%. In other words, a citizen with a gross income between COP $5 and 10 million a month had to pay an income tax at an effective rate of 7%, while another individual with a gross income of COP $100 million a month pays only 2%.

 

In the case of wealth, 10% of the wealthiest natural persons that file taxes concentrate 53% of the gross equity (total assets and property right in name of the tax contributor, person, or business) and 55% of the liquid equity (gross equity minus financial liabilities.)

 

The average equity of the 10th decile 10 (close to COP $2,000 million or USD $500,000) is 147 times the 1 and 42 decile times the average of 1, 2, and 3 deciles. This means that people of the 1st decile require close to 30 years to achieve the equity of the people of the 10th decile, or 139 years to reach the equity level of the wealthiest 1%.

 

In the case of legal entities, the same analysis has been performed based on tax administration records also filed with the Colombian Financial and Societies Superintendence. Then, 0.25% of the largest companies in Colombia concentrate 37% of the gross equity, while 1% of the companies with less equity would need close to 309 years to obtain the equity of the 25 largest companies in the country.

 

The preferential tax treatments –without the due social or economic justification, in most cases– lead to a very low effective tax rate (payable tax/gross income) for the wealthiest people in the country. In other words, the tax regime is characterized by a marked pro wealthy bias, especially pro superwealthy.

 

Likewise, based on DIAN income tax returns, 15 companies concentrate 29% of the total equity, in marked contrast with 25% of the companies with less equity which would require 485 years to reach the equity level of these 15 companies.

 

According to the Employment Mission, there are close to 7,200,000 businesses in Colombia, 97% of which have between 1 and 2 workers; 2% between 4 and 10; and the remaining 1%, 11 or more employees. Furthermore, 82% are informal workers and the remaining 18% formal, which indicates that an important percentage of the companies are not the most favored with tax benefits that the Tax Statue provides through non-taxable income, exempt income, and tax discounts.

 

The non-taxable income filed by companies in 2019 reached COP $40B (USD $10.000 million, 3.8% of the GDP), which counted at the current tax rate (35%) would equal to the Government waiving taxes close to COP $14B (USD $3.500 million).

 

Additionally, 2019 filed exempt taxes reached COP $13B, which counted at the current nominal tax rate would equal to the Government waiving of COP $4.5B (USD $1.138 million).

 

We also need to highlight that the companies with the greatest economic and political capability get greater access to tax benefits provided by the Tax Statue. So, 1 x 1,000 of the largest companies concentrate 87% of the non-taxable income, 70% of the exempt taxes, and 80% of the tax discounts.

 

Another thing to highlight of these companies is that close to 70% of the equity is represented in assets and financial investments, in marked contrast with the participation of intangible and productive assets of scarcely 25%, noting a clear income-based trait of company equity allocations. In other words, they are more on the financial than in the productive orbit (machinery, equipment, among others).

 

Therefore, the Total Tax Expenditure over income tax is close to 3.5% of the GDP a year: 2.5% in case of legal entities and 1% for natural persons (concentrated on the wealthiest people of the country, representing 18% of the total tax collection of the country).

Inequality in land access

 

Another dimension of inequality and very important for Colombia is the high concentration of land. According to the latest 2014 National Agricultural Census, 74% of the agricultural productive units are in lands of less than 5 hectares, while 0.4% are in units of more than 500 hectares.

 

Many of these units have a land use different from their natural calling. Data of the Agricultural and Livestock Rural Planning Unit reveal that of the 22 million hectares with an agricultural calling, just 5 million are devoted to agrarian crops, while 34 million are pastures when only 14 million hectares (13.3%) have a calling for cattle farming.

 

Based on the prior, this is why many people are thinking on structural tax reform –which under the principles of a social rule of law, established in the Political Constitution of 1991–increasing the effective tax rate for natural persons and companies, progressively dismantling the tax benefits; impose a progressive equity tax that interacts with the tax on movable and immovable property for municipal territorial entities; impose a land (property) tax based on current land appraisals; consider the suitability of use and land calling; a VAT (value-added tax) to consumption for people with greater income, among other measures.

 

Increasing the tax pressure in the country (lower than 3.4 percentage points of the average GDP in Latin American and Caribbean countries) would allow that, apart from matching the tax pressure of other countries of the region, could provide the necessary funds for prioritized and ineluctable needs of public expenditure and guarantee that, as opposed to the traditional structure, taxing is sufficiently progressive and redistributive to decisively contribute to reducing the unacceptable levels of reigning inequality with wealth concentration in Colombia.

 


 

* The current analysis is essentially based on books from the authors: Dinámica de las desigualdades en Colombia: En torno a la economía política en los ámbitos socio-económico, tributario y territorial- 2019 (Dynamics of the inequalities in Colombia: Around an economy policy in the socio-economic, tax and territorial scopes.) Bogotá: Ediciones Desde Abajo; Desigualdad y reforma estructural tributaria en Colombia: Hacia una economía política de inclusión social- 2020 (Inequality and structural tax reform in Colombia: Towards a social inclusion policy.) Bogotá: Ediciones Desde Abajo, and Concentración y composición de ingresos y gastos de los hogares y reforma de la tributación en Colombia– 2021 (Concentration and structure of household income and spending, taxing reform in Colombia.) Bogotá: Ediciones Desde Abajo. 

Consejo Editorial