Colombia’s congress on Thursday approved a new tax reform that the Finance Ministry claimed will “move Colombia towards prosperity” and “reduce inequality.”
The initiative, which will take effect on January 1, received strong support from both the House of Representatives and the Senate.
President Juan Manuel Santos, Finance Minister Mauricio Cardenas and the World Bank have championed the proposal insisting that adjusting tax rates and eliminating others will spur job creation and begin tackling “the enormous problem of inequality in Colombia.”
The Finance Minister lauded the reform saying it will lead to “more modern [and] formal employment, that meets all the conditions…[of] a more developed society, a modern society.”
“This tax reform will allow us to stop being one of the most unequal countries [on] this continent, [we will become] a country with more equity…because high income Colombians will pay a little more taxes,” Cardenas said on Thursday.
The World Bank previously highlighted labor informality as one of the biggest problems facing the Colombian economy.
“Bringing down the cost of formal labor, as proposed in the current tax reform, should therefore help reduce informality and unemployment, and therefore inequality,” wrote Lars Christian Moller, the World Bank’s Senior Country Economist for Colombia.
Colombia’s new tax reform brings down the cost of labor by replacing the employment tax, “a handbrake” to job creation as Cardenas put it, with a new equity tax. This theoretically makes firms more open to hiring more workers because the tax burden is shifted to profits rather than the actual labor itself.
There are two ways to make labor attractive to employers, according to the Senior World Bank Economist.
“One way is to lower the costs of labor, which [this tax] reform does by lowering the taxes firms pay on healthcare and SENA, and the other [way] is to have a better educated labor force,” Moller told Colombia Reports.
During the last session before the tax reform was passed, Congress included a social clause that will allocate more than $675 million over the next three years to health, education and rural development services.
The Ministry of Finance announced that because of this clause, Colombia “will have [over $675 million] over the next three years [approximately $281 million per year] to respond to students in public universities [and] students of technical institutes.”