Conservative Colombia Feels Pressure to Tax the Rich
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Colombia has long enjoyed the reputation of a conservative economic bastion. Now it's under pressure to go the way of its left-leaning neighbors on taxes.
By Michael Stott
Alberto Carrasquilla heard a clear message from the mass protests that shook Latin American nations last year: taxes need to go up.
Carrasquilla, Colombia’s finance minister, says that although his country was Latin America’s best-performing major economy last year, growing 3.3 percent, the government needs to listen to the demands of hundreds of thousands of protesters for improvements to public services, to be funded by the better-off.
“We have a middle class which is growing and this middle class is more demanding,” Carrasquilla says. “It wants more and better public services. The big challenge we have in Colombia is that our collection of taxes is very low for the level of income…The only way to break out of [this situation] is with higher taxation.”
His comments are a sign of how deeply the reverberations from riots that began in Chile in October have been felt across Latin America. Like Chile, Colombia enjoys a strong reputation among investors for conservative macroeconomic policies and steady growth, mostly avoiding the booms and busts that have beset its neighbors.
But the millions who poured on to the streets of cities up and down the Andean region last year demanding better pensions, free access to universities and higher quality healthcare have prompted governments to rethink an economic model that had relied heavily on free-market economics to deliver improved living standards.
Colombia’s top rate of income tax rose last year to 39 percent from 33 percent as part of a broader reform that also reduced high levels of corporate tax. But Carrasquilla does not want to stop there. “We are being told we should tax three to four percentage points of GDP more and use that money intelligently,” he says, referring to advice given by international organizations.
I think the message Latin America should get is that the middle class is now very strong.
Alberto Carrasquilla, Colombian finance minister
An economist with a doctorate from the University of Illinois, Carrasquilla is serving as Colombia’s finance minister for a second time. But he acknowledges that the challenges he now faces are very different. His first period in the job was in 2003-7, a halcyon era in which Latin America was enjoying a commodities boom and Colombia’s growth was averaging almost 6 percent a year.
“I think the message Latin America should get is that the middle class is now very strong,” he says. “It’s more educated and more urban, it can organize more easily with technology and we need to be aware that there are some concerns which didn’t exist 10 or 15 years ago.”
Opponents say President Iván Duque’s government needs to go beyond raising personal taxes and boosting spending to attacking corruption and inequality. Sergio Fajardo, a centre-left former mayor who ran against Duque for the presidency in 2018, says Colombians’ perceptions of corruption have changed.
Previously, voters criticized individual politicians, many of them mayors or governors in remoter parts of the country, as corrupt. Now, Fajardo says, “there is a generalized perception that ‘They are robbing me’, that this is a corrupt system and it’s taking opportunities away from me.”
Colombia has also had to contend with an unprecedented influx of migration over the past four years, as more than 1.6 million Venezuelans fled poverty and repression to settle in the neighboring country. The refugees are boosting growth, but Carrasquilla estimates that they are costing about 0.4 percent of gross domestic product in extra health and education spending.
Away from the picket lines in the boardrooms of Bogotá, the concerns of business center on the weakness of the export sector, which is still heavily dependent on sales of oil and coal. Poor infrastructure and persistent rural violence have held back agricultural exports, which many feel should be a bigger proportion of the total.
Growing domestic demand pushed up Colombia’s imports last year but exports were sluggish, meaning the current account deficit widened to an estimated 4.4 percent. The IMF commented after a recent visit that “the deficit should continue to be comfortably financed by buoyant FDI [foreign direct investment] and relatively resilient portfolio inflows” but noted that Colombia was now more exposed to negative risks.
Ricardo Avila, a senior analyst with El Tiempo newspaper, credits Carrasquilla with improving Colombia’s growth rate and meeting fiscal deficit targets but worries about a growing use of one-off income, such as central bank profits, to balance the books. “There are underlying concerns about how sustainable the model is in the long term,” he says.
Carrasquilla may not need to worry about Colombia’s taxation and spending for much longer. Local media reports suggest he is eyeing a move to the central bank, perhaps at the end of the year.
“We still have some important tasks to carry out here,” he says of his current job. But when pressed on the central bank role, he adds: “It could be, in the future . . . it’s very interesting. My first job was there, I have many connections there . . . I know it very well.”
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