I haven't upkept this thread because I assume nobody cares.
Some weeks ago, the Duque government (otherwise a very right-wing one) came up with a major plan for tax reform. Presented as a response to the soaring budget deficit (7% of GDP this year, 8% last year), it was basically a series of tax increases across the board, but the middle class and poor were hit the hardest: many tax breaks were eliminated, the threshold where salaries start to be taxes was significantly lowered, business taxes were increased and the categories of goods covered by VAT were expanded.
The tax reform was rather ambitious and actually represented something of a policy shift by the government, which had previously followed a standard right-wing idea of lowering taxes and making things easier for businesses. The tax reform set out to collect 23.4 trillion pesos (2% of GDP), by expanding the individual income tax base (17 trillion COP), VAT changes (7.4 trillion COP) and corporate tax changes (3.7 trillion COP). Much of the new income would be used to fill the the fiscal hole - but also to fund an expanded basic income for the poor, which was the tax reform's most attractive selling point. The government called it 'sustainable solidarity law' (because 'tax reform' is an eternally toxic name) and projected that, thanks to it, poverty would be reduced by 2.8% and extreme poverty by 5.8%.
In 2020, during the pandemic, the government created a sort of basic income program,
Ingreso Solidario, targeted to the 3 million poorest households, with no strings attached. It had a somewhat positive effect, and the tax reform proposed to expand it to 4.7 million households (18.8 million people) albeit with lower amounts (at least 80,000 pesos, at most 65% of the minimum wage). The tax reform also included tax incentives for job creation among specific vulnerable demographics, an extension of the pandemic wage subsidy program and increasing resources in order to fund up to 100% of poor students' tuition fees in post-secondary institutions.
Colombia's tax system is inefficient, dysfunctional and unfair. There are a bunch of tax incentives, exemptions and deductions which skews the tax system, usually in favour of the rich. The corporate tax rate is high, but with special local taxes or loopholes and tax breaks that make it dysfunctional. Colombia collects very little of its revenue from individual income taxes (6% of tax revenues), and has various benefits and deductions which end up favouring the very rich, so experts have long said that Colombia needs to expand its tax base, meaning that more people - the middle-class - would need to pay income tax. The VAT is one of Colombia's main sources of tax revenue, although only 39% of goods pay VAT, and the system is riddled with exemptions, exclusions and goods at a 5% reduced rate. Experts have long recommended to significantly reduce the number of exempted or excluded goods, tax more goods at the full 19% rate and eventually impose VAT on basic consumer goods (the
canasta básica) with a compensation mechanism for the poor (something introduced in 2020).
The problem is that while many of these recommendations are probably technically sound, they're politically unpopular (especially the VAT on basic consumer goods, which causes massive resistance each time).
The tax reform did not actually propose to significantly expand the categories of goods and services covered by the VAT - only from 39% to 43% of goods, after Duque forced his finance people to walk back the toxic idea of VAT on coffee, salt, sugar and chocolate. It proposed to eliminate nearly all 'exemptions' (which allows producers to get a refund of taxes they paid to produce exempted goods), although basic consumer goods like eggs, milks, meat and rice currently exempted would be 'excluded' (taxed at 0% but with no refund system for producers). The reform would have raised the VAT on certain things - most notably gasoline and diesel fuel (from 5% to 19%) and public utilities for socio-economic strata 4, 5 and 6. On the other hand, as a carrot, it would have extended the VAT compensation mechanism from 1 to 4.7 million households and increased it to 50,000 pesos.
Much of the new income would have come from expanding the tax base, gradually, so that by 2024, people earning ~2.5 million pesos a month ($660) would start paying income tax at a marginal rate of 10% (the current threshold is ~4.7 million pesos/monthly). Colombia's minimum wage is around 900,000 pesos/month, and the average salary is not a lot higher. This would primarily affect the middle-class, who would also be hurt by the VAT increases and the lack of refunds or cash transfers.
The tax reform also proposed to extend the wealth tax (on assets over 5,000 million pesos, ~$1.3 million, at 1% or 3%) until 2023, increase the dividend tax rate (but also increase the threshold where dividends would be taxed), create another temporary tax on high incomes for the rest of 2021 (deductible from taxes in 2022-3) and tax pensions over 7 million pesos. While this may seem like a lot, it's not: the reform did not, in reality, touch the richest few all that much.
It also would have create two corporate tax rates, which would benefit small businesses, who would have paid at a 27% rate (24% after 2024), while larger businesses would have had to pay a 3% surtax higher for two years before returning to the current 30% rate. Following the commission's recommendation, it would have eliminated many tax incentives, exemptions and deductions (several of which created by the government's previous tax reform in 2018-9, like the ones for hotels, tourism, the orange economy, green energy, agroindustry, social housing) beginning in 2023.
Finally, it would have created or modified green taxes: including coal in the carbon tax, creating a local tax on vehicles based on how much they pollute and creating taxes on single-use plastics and non-organic pesticides.
In short, the proposed 'sustainable solidarity law' was actually a shift away from trickle-down economics/standard fare neoliberalism to an attempt at structural tax reform with some redistributive aims. But the middle-class would suffer the main fiscal blow, rather than the rich.
Now it seems that the government saw the writing on the wall. The Minister of Finance, Alberto Carrasquilla, resigned along with his deputy and Duque announced that parts of the reform are cancelled - most importantly, there won't be a sales tax on food, utilities and gasoline. Knowing uribistas, this happened not so much because of the protests but rather because the plan had no support even within the governing Centro Democrático, never mind other parties. Indeed, it seems that the government was prepared to use even more force to suppress the protests - the Minister of Defence said that "according to intelligence information, criminal and terrorist acts in Calí [third largest city in Colombia and the site of largest demonstrations] correspond to criminal organizations and terrorists" and 4000 troops were moved into the city.
Tax reforms in Colombia are always unpopular. They are are even more politically difficult and unpopular a year out from elections, when most members of Congress are concerned with their own reelection. They are
even more difficult in the midst of a deadly pandemic, which has placed over 3 million people in poverty and cancelled out all the progress made in reducing poverty over the past decade. The government hoped that its messaging focused on 'solidarity' and the social parts would help soften the blow, but it probably didn't expect how strong the blowback to the idea of "middle-class tax increases" would be: regardless of the actual numbers, everybody, particularly urban Colombia (the one which the media focuses on), likes to think that they're middle-class.
Even before the official text of this tax reform was presented, there was already widespread opposition - including from some the government likely expected would be friendly.
Uribista bases disliked the tax increases, and demanded budget cuts and austerity. Germán Vargas Lleras published searing columns in
El Tiempo attacking the tax increases on the rich, claiming it 'suffocates the productive sector' and 'expropriates savings'. The sectorial lobbies and associations voiced their opposition to the bits that would impact them - for example, the Colombian Agricultural Society (SAC) warned that prices would increase with the elimination of VAT exemptions. The national trades council (CGN) and the ANDI (the industrialists' association) rejected the government's proposals, and presented their own, more modest, counterproposals. The ANDI's counterproposal aims to raise 13-14 trillion pesos, without touching the VAT or individual income taxes.
All of the political parties at least criticized specific proposals - mostly VAT changes, income tax increases and pension taxation. The CD, Conservatives, La U, Colombia Justa Libre and some Greens proposed alternative ideas, to avoid touching the VAT or income taxes. Other parties - the Liberals, Cambio Radical and the rest of the opposition - called on the government to withdraw it altogether.
The CD, whose support was probably most crucial for the government, claimed to support the "social and savings" parts of the reform, but pushed for major adjustments to the rest. The government, which knew that it would have to make major concessions, claimed that it was open to modifying the text. But when the government made only very minor concessions, Uribe made an 'anguished plea' on Twitter for the government to propose a simple text.
With the willingness of the CD, La U and the Conservatives to sit down and talk about a far more modest reform, the government hoped to save its ass. Duque's only red line was that he would not withdraw the reform. This, in turn, motivated protesters to demand exactly that.
Duque probably (arrogantly) assumed that the protests would not be as big as they ended up being - he likely thought that the third wave of the pandemic would kill off protests, just like the beginning of the pandemic in March 2020 killed off the 2019 protest movement. He badly misread the state of the country - the exhaustion, anger, frustration and social distress - which isn't surprising given his personality and the type of people he surrounds himself with. On the other hand, Uribe, a much smarter politician, does understand how delicate (and dangerous, for him) the situation really is, and helps to explain why he was visibly annoyed by the government's reticence to reduce its ambitions.
Duque also never really defended his own government's reform with all that much passion: this was very much Carrasquilla's project, shared with his vice minister, and well... Carrasquilla is a terrible communicator who has always been one of the government's most unpopular ministers. It's a surprise that he lasted this long, in fact.
Being forced to withdraw the tax reform, which is the
one thing he didn't want to do, is a major - fatal - blow to Duque's government. Although he has over a year left in office, Duque's government - in terms of major legislative and policy initiatives - is basically over. He'll likely be able to get a much watered-down, mini tax reform that will barely be enough for anything (either repaying debt or funding social programs), and will require that the next president passes a bigger, structural reform in 2022-23. There's little he can (or wants to) do to respond to protesters' demands and anger, besides more repression and the old politics of fear and stigmatization (where he will have strong support from
uribismo, which in fact is already peeved that Duque hasn't done a Tlatelolco yet).
Poor Porky.
I suppose you can't count him out in 2022 though, even then.
Yes, he can, for the simple reason that presidential reelection was abolished over five years ago.
