The Colombian government is doing everything it can in the short term to combat income inequality and labor informality, said the World Bank.
The administration of President Juan Manuel Santos “is trying to tackle the enormous problem of inequality in Colombia by addressing fiscal redistribution, the most effective short-term way of dealing with a country’s inequality,” Senior Country Economist for Colombia Lars Christian Moller told Colombia Reports.
The fiscal redistribution Moller is referring to is the recently proposed tax reform backed by Colombian President Juan Manuel Santos and Finance Minister Mauricio Cardenas. The government claims the new policy is progressive, that it will lower the Gini coefficient and create upwards of one million jobs.
The proposal, which went before congress in early October, was immediately met with harsh criticism from opposition senators, namely Senator Jorge Robledo.
According to the Socialist Senator, the Santos-backed reform is not progressive “because it is [designed] to pay what the big companies do not pay.”
“I don’t think that it’s fair to say that firms just benefit from tons of tax exemptions [or] that their tax burdens are very low,” the World Bank analyst said.
The tax revenue Colombia receives from firms is “much higher than in other countries,” Moller added.
The corporate tax break Robledo is referring to is the proposed eight percent reduction of the payroll tax which the government claimed has made it difficult for companies to hire labor in Colombia. What the charismatic Senator does not mention however, is that the proposed decrease will be offset by a new equity tax.
The purpose of the new equity tax is simply to shift taxation from labor to capital, in theory making labor more affordable for companies to hire.
“Colombia has the highest unemployment rate in [Latin America]. It’s a structurally high unemployment, which means that even when the economy is going well, like now, with a high GDP, there’s still high unemployment,” Moller explained.
To combat this, labor has to become more attractive and there are two ways to accomplish that according to Moller. One way is to lower the costs of labor, which this proposal addresses by lowering the taxes firms pay on healthcare and sena, and the other is to have a better educated labor force.
Addressing education issues is a long-term solution, making labor less expensive is a tangible, short-term fix.
If the Santos administration is correct, that this proposal, which was partly formed with help from the World Bank, will spur the creation of one million new jobs, Colombia’s Gini coefficient will fall two points, making it identical to Brazil’s.