The dilemma of tax reform: structural or fiscal?
On October 20, the Minister of Finance, Mauricio Cárdenas, presented to the Congress the law project on tax reform, largely based on the report of the Commission of Tax Experts. The national government aims to raise $ 7.2 billion and thus compensate the reduction in the Nation's income caused by factors such as the fall in oil prices, the reduction of economic growth, which - according to projections for 2016 of the Bank of the Republic, can be around 2% -, and the elimination of temporary taxes from 2018.
In fact, the reform to the current tax structure covers a great variety of taxes, measuring its relevance according to its impact on the national treasury. Undoubtedly, the most significant contributions come from income tax and value added tax (VAT), each of which contributes approximately 40%.
According to the Minister of Finance, the reform intends that those who earn more, pay more, likewise, facilitate compliance with tax obligations. He argues that societies that currently pay four direct taxes (rent, business income tax for equity (CREE), surplus to CREE and wealth) will pay only one: income. The novelty of the proposal, in terms of direct taxes, is the dividend tax. This initiative was presented in the 2014 legislature; however, on that occasion, it was not adopted because the congressmen argued that doing so would generate double taxation. Currently there is a favorable environment to implement it, since at global level Piketty's tax equity proposal has been widely accepted. The French economist argues that in order to combat inequality, given that the rate of growth of the economy is less than the rate of return on capital, capital must be taxed directly; therefore, in the legislative initiative the natural persons with higher incomes should contribute more to the tax office.
Divergent opinions have emerged around direct taxes. For the president of the National Association of Industrialists (ANDI, by its acronym in Spanish), Bruce Mac Master, the proposal does not contribute to improve the competitiveness of companies, since if the four taxes described above are compared with the two included in the reform project (income and dividends), it turns out that the sum of the latter two is greater than what the entrepreneurs currently pay. According to Mac Master, by 2017, with the existing combination in front of the level established in the reform project, it would go from 42.1 to 44.8%, that is, the rate would increase. In 2018 it would remain at 42.1% and, from 2019, according to the current composition of the income tax, it would be at 34%. In addition, with the proposal suggested, this would amount to 39%. In sum, for ANDI, the amount of direct taxes suggested in the law project is higher than the one currently paid, which, if approved as such, it will affect investment and, therefore, economic growth and generation of employment.
On the other hand, for some analysts such as Eduardo Sarmiento, Jorge Iván González and Armando Rodríguez, among others, the proposal of tax reform in matters pertaining to direct taxes is not progressive. Sarmiento considers that by replacing the tax on wealth and income by income and dividends, the effective contribution is reduced from 41 to 33%, that is, direct taxes are replaced by indirect ones, and the progressivity of assets and income to legal persons is reduced, increasing the taxation of labor compared to that of capital.
For his part, González points out that the income tax rate declines as income rises, "instead of becoming exponential". By not substantially affecting property and wealth, reform is not progressive and, therefore, does not contribute to equity. Rodríguez argues that for 2014 the effective rate for both income and VAT was 21.7% and 21.3%, respectively, which undermines the thesis of those who consider that the companies contribute to the State 70% of their profits.
Regarding the main indirect tax, VAT, the proposal contemplates the possibility of raising the general rate from 16 to 19%. Some products, such as sugar, pasta, coffee, among others that have been paying a VAT of 5%, maintain this rate. Most of the family basket is exempt from this tax. Undoubtedly, this is the most controversial point of the tax reform project and the one that has caused the most criticism, because VAT is a regressive tax, since it is paid by all people, regardless of whether they have a high or low income.
From the above it can be inferred that the proposal of tax reform is not structural, but rather fiscal. To be structural, says González, two conditions must be fulfilled: first, both taxes and subsidies and their net effect on households must be taken into account. While the project mentions the need to assess the impact of the two instruments on households, the impacts of these two instruments are not considered in relation to existing subsidies.
Secondly, it is crucial, if the reform substantially alters the relations between the factors of production (capital and labor). The proposal questions the nominal rate of corporate income tax, arguing that it is very high compared to countries of similar development to ours, but does not specify the magnitude of the effective rate that is determinant, being considerably lower. Despite this, in the proposal are low middle class households (wages starting at $ 2,300,000 per month) who will now have to pay income tax. The reform is fiscalist to the extent that it will serve to plug the current fiscal deficit, as well as to solve some problems of taxpayers and remove some limitations of the current tax regime.
LUIS E. VALLEJO ZAMUDIO
Director of Apuntes del Cenes Journal