Colombia does not show a high tax revenue as percentage of its GDP as other countries do. Colombia showed a tax revenue of 15.2% as percentage of its GDP in 2010%, most of it comes from central government tax revenue and less from regions and municipalities. Therefore, Colombia has space to increase tax revenues through a well worked tax reform where those who can pay more do it. From my point of view, Colombia has to register all its tax revenues (central government, regions and municipalities tax revenues) in a national entity which main duty is to work exclusively in getting a better income distribution in Colombia. Moreover, an econometric model shows that a high tax revenue as percentage of GDP brings better income distribution in Colombia, an increase of this variable in 1% comes with a reduction of GINI index in 0.054%. However, tax reform is not enough to improve Colombia income distribution, there are other things such as public servants corruption reduction and better opportunities through economy openness for those who are located in low income rank.
Author: Humberto Bernal,
Economist
e-mail: zhumber@gmail.com
Free market is one way to solve socio-economic problem but some times it brings results that society do not desire, therefore it must be a public sector which works out to solve these market failures. The most important for getting the desired results by the society is a transparent work by public servants. Unfortunately Colombia faces high indicator of public servants corruption and lack of commitment by them to get a better society. Nevertheless, it is right to point out where Colombia is about tax revenues and what can be the best track to reach a better income distribution. Colombia does not show high tax revenue as a percentage of Gross Domestic Product (GDP), by 2010 Colombia reached a central government tax revenue of 12.3% as a percentage of its GDP, this value is under average of those faced by other countries as figure 1 shows. The world’ s average value was 16.6% in 2010 where the United Kingdom showed 25.9%, Ecuador showed 27.2% and Luxembourg showed 24.6%. Those countries that showed a lower indicator than Colombia where the United States with 9.3, Switzerland with 10.9 and Panama with 9.2% according to World Bank data. The total countries registered were 156.
Figure 1. Central government tax revenue around the world 2010
< 9.0
|
9.0 and 13.0
|
13.0 and 16.0
|
16.0 and 20.0
|
20 >
|
Source: World Bank Indicators and Magic Maps.
Colombia is divided in three political administrative divisions: first is the central government; second is the regions (departamentos in spanish); and third is municipalities (municipios in spanish). The highest tax revenues is reached by central government as figure 2 shows. Central government tax revenue was 12.3% as a percentage of Colombia’s GDP, this figure showed a positive average growth rate since 2000. Tax revenue collected by regions showed a positive average growth rate also, this value was 1.7% of Colombia’s GDP in 2010 as figure 2 shows. Finally, tax revenue collected by municipalities reached 1.2% of Colombia’s GDP, as the other two, it showed a positive average growth rate. The total colombia tax revenue reached was 15.2% as percentage of its GDP, this indicator showed a positive average growth rate too, it was 11.6% in 2000 and 16.2% in 2006 as figure 2 shows.
Figure 2. Colombian tax revenue as a share of GDP by government entity
2000-2010 (%)
Source: Colombian Central Bank, DNP Colombia and DANE Colombia.
Colombia has approximately 30 taxes charged by central government, regions and municipalities including VAT, income tax, tax on financial transactions, tax on spirits (liqueur), gas tax and others. The main problem of these taxes is that they are low for those activities that harm to society, for intense the right thing is to charge a high tax to automobiles in order to reduce pollution and traffic jam problems. Somebody could say that automobile sector pulls up the economy when it is going down but the true is that the same sector working to get a better public transport can let same results. Other example can be applied to factories which get the highest profits, they must pay a higher income tax than small factories in terms of profits. All this information is available at low cost to make it possible.
Therefore, in order to reduce the perverse income distribution faced by Colombia as figure 3 shows, then Colombia has to work out in a national tax reform where central government, regions and municipalities charged hight taxes to those who can pay it. This reform must be balanced between these three political divisions and tax revenue payments must be reported and continually supervised by a central agency where main objective must be income distribution.
Figure 3. Colombia GINI coefficient
2000-2010
*2007: Estimation.
Source: DNP Colombia.
This better income distribution target through well set up tax reform can be reached. Colombia has an option to increase taxes from those who can pay it due to she is under the world average ratio tax-GDP. Table 1 shows that an increase of 1% of tax revenue as percentage of GDP, it lets a reduction of 0.054% in GINI coefficient. This conclusion come from 24 out of 33 regions in Colombia where the time period is from 2008 to 2010. There are other variables that help to improve income distribution, for instance if GDP per-capita shows an increase of 1%, the GINI coefficient will decline about 0.064%. Unemployment works in same direction, therefore if government works hard through tax reform, better economic growth and low unemployment, then by sure Colombia will be a better place. There is a fact to be highlighted, the economy openness indicator (export plus imports divided into GDP %) does not show the right sing, it is positive what means that economy openness increase of 1% lets an increase of GINI in 0.009%. This fact means that most of benefits from economy openness is won by high income people, therefore central government and the other public divisions must work hard to let low income people win through Free Trade Agreements too.
Table 1. GINI explained by taxes and other variables from 24 regions in Colombia. A Panel Random Model
2000-2010
Variable
|
Ln(GINI)
|
Ln(Tax as share of GDP %)
|
-0.054***
(0.028)
|
Ln(GDP per capita)
|
-0.064****
(0.022)
|
Unemployment rate (%)
|
-0.003*
(0.002)
|
Ln(Economy openness %)
|
0.009**
(0.005)
|
Constant
|
4.569****
(0.194)
|
R2
|
0.221
|
Observations
|
72
|
Hausman test probability+
|
0.720
|
+ Hausmant test null hypothesis: random effects are consistent.
Source: own calculations, Stata 12.1.
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