THE Colombian economy has done remarkably well over the last decade, but a comprehensive tax reform that promotes investment beyond the oil and mining sector is needed to put the country on a path toward stronger, sustainable and inclusive growth, according to the latest OECD Economic Survey of Colombia.
The Survey, presented in Bogota by Alvaro Pereira, director of country studies in the OECD Economics Department, Mauricio Cárdenas Santamaría, Minister of Finance and Public Credit of Colombia, and José Uribe, Governor of the Colombian Central Bank, notes that the country has consistently been among the fastest growing in Latin America since the early 2000s. Colombia is projected to grow close to 4.5% in the coming years, despite less favourable external conditions.
The OECD identifies a number of policies critical for future growth and reducing the still-high levels of income inequality. A comprehensive tax reform is needed to make the tax system more investment-friendly, more efficient and fairer, while pension system reform could reduce old-age poverty. Boosting infrastructure investment - by fulfilling the government's road concession programme (4G) - and making sub-national investment more effective are also top priorities, the Survey said.
“The Colombian economy has shown remarkable dynamism and strength in recent years, but the decline in oil and coal prices presents a challenge to sustaining growth,” Mr Pereira said. “A comprehensive tax reform can provide the boost to growth and investment needed to diversify the economy, further reduce labour informality and improve the well-being of all Colombians.”
The tax reform must address Colombia's high tax rates on corporate profits, Value-Added Tax on investment goods and the net wealth tax, all of which combine to penalise investment, the OECD said. The Survey recommends gradually lowering the corporate income tax rate while enlarging the base, so more firms actually pay taxes.
Strengthening the tax administration and increasing penalties will reduce tax evasion. OECD research shows that a 50% reduction in VAT and corporate tax evasion could bring more than COP 15 trillion (USD 8 billion) in additional revenues. This windfall could help finance social and infrastructure investments, as well as part of the implementation costs of any future peace plan.
Colombia can also make taxation greener, through introduction of a carbon tax, and fairer, by reducing generous personal income tax exemptions and deductions that benefit mainly wealthy taxpayers, notably as concerns high pensions and dividends, the Survey said.
The OECD also recommends an in-depth reform of the pension system to reduce old-age poverty and inequality. Around two-thirds of the elderly do not currently have any form of pension, while the minimum old-age income support is below the national poverty line.
Reforms can simultaneously ensure that the elderly have access to a decent pension while maintaining sound public finances. The OECD supports an expansion of eligibility for the Beneficios Económicos Periódicos programme, alongside increased coverage and benefit levels of the minimum income support Colombia Mayor programme. Reforms that reduce labour informality can expand both coverage and funding for the programmes.
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