The politics of austerity suffered a significant setback in Colombia. After three months of debate and negotiations, President Gustavo Petro achieved a major legislative triumph in November when Congress passed his ambitious tax reform bill.
The new tax regime follows a very straightforward principle: those who earn and own more, pay more.
While the $20 trillion Colombian pesos (COP) – or approximately $4 billion US dollars (USD)– that the government expects to collect as a result of the tax reform bill is considerably less than the $50 trillion COP it hoped to initially raise, the bill endows the state with additional resources it needs to fulfill the administration’s campaign promises of financing social programs that seek to end hunger and close historic inequality gaps.
The plan increases corporate taxes and imposes higher duties on windfall gains from coal and oil, but the highlight of the reform bill is undoubtedly the establishment of a permanent progressive wealth tax. This is very much a necessary measure, especially when taking into account the extreme levels of wealth concentration that exists in Colombia.
The top one percent of the country’s population possesses $229.7 billion USD, or 37.3 percent of Colombia’s total wealth, which is currently at $616 billion USD for 2021. The top ten percent has nearly three-quarters of the nation’s wealth, meanwhile the bottom half of the population retains a mere 1.6 percent.
A wealth tax can help reverse these extreme material inequalities, but only if it is effectively designed. A short paper published earlier this year by Emmanuel Saez and Gabriel Zucman examined the history of progressive wealth taxation in Europe. They called attention to the fact that the wealth thresholds set in a number of European countries were simply too low. The upper-middle-classes – whose main and most valuable asset is their home – were impacted and, as a result, cash poor households were burdened with a new tax obligation they had difficulty paying.
It is no surprise then that the implementation of a wealth tax in Europe was unpopular. Challenges in liquidity generated demands for primary homes and other non-income producing assets to be exempt. These exemptions were granted and later exploited by the ultrawealthy, eroding the tax base and hindering the state’s ability to raise any significant revenue.