Colombia will face a new tax structure from 2013. There are many changes, one of the most important is the abolition of Payroll Tax called Parafiscal Tax, this tax is 9% of employees’ wage that means a total government revenue of US$4.3 billion (after evasion) in 2011 or 1.26% of Colombian GDP. This revenue is taken to invest in education and family health. However, this Payroll Tax shows huge evasion, it is about 50% between 2000 and 2011, moreover it allows large losses in social welfare accounting in 759 thousand of employees. Government took right decision in taking profits from firms to finance eduction and family health to keep their status quo due to abolition of Payroll Tax. Nevertheless there is a big issue about collecting taxes, Colombia faces a huge evasion of tax payments, therefore the government tax collector called DIAN has a big work to do.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Colombia will face a tax reform for 2013, there are many issues to deal in this reform. This note takes into account Payroll Tax known as Parafiscal Tax. This tax is 9% of total employees wage and its revenue is taken to invest in social projects such as education and family health. The total revenue should have been about US$745 million per month in 2011 or in annual terms 2.51% as percentage of GDP in Colombia, however there was a revenue of US$349 per month in 2011 due to this tax, therefore there was evasion about 53% in 2011, this evasion was similar between 2000 and 2011. Moreover this Pay Roll tax generates social welfare reduction in about 759 thousands of employees and higher labor payments for employers and lower wages for employees as figure 1 shows.
Figure 1. Labor market and Payroll tax (parafiscal tax*) in Colombia 2011
(monthly dada)
*Payroll taxes taken into account:
ICBF (Children health): 3% of wage,
SENA (Technical education): 2% of wage,
C.C.F (Family health): 4% of wage.
Source: Own calculations and government information.
Government is aware of investing in social projects decided to take money from other tax called profit tax (Renta Tax) to keep status quo in education and family health. In Colombia profits tax (Renta Tax) is 33% of firms’s profits, this tax will be divided in two: 8% to keep the status quo as was pointed above and 25% to spend in other goods as government required. The most important to highlight is this profit tax does not push down social welfare as figure 2 shows. This tax is charged after production takes place, therefore firms maximize profits without take profit tax into account, one can say that this profit tax is progressive or pays more attention on those who earn high profits.
Thought this information one can say that government did a proper work on changing tax structure in labor market.
Figure 2. New structure profit tax in Colombia 2011
(goods market)
(goods market)
Source: Own calculation and government tax collector (DIAN).
Hard work for government tax collector (DIAN)
Due to Payroll Tax government got about US$ 349 millions per month in 2011 or US$4.2 billion in annual terms, therefore the government tax collector will have to keep her eye on firms balance sheets to avoid evasion which is frequent and high in Colombia.
Through forecasts the New Tax will generate same revenue as before (under Payroll Tax), the revenue will be around US$5.4 billions in 2013 and US$ 6.3 billion in 2014. However, there is a big issue that must be sorted, it is to avoid evasion, as example Payroll Tax faced about 53% of evasion from total revenue. Society will evaluate government tax collector (DIAN) at the end of next year.
Figure 3. Payroll Tax revenue and New Tax revenue on profits
2000-2014F*
(US$ billion)
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