Colombia tries to fix a messy and unfair tax
THE POLITICS of value-added tax (VAT) are complicated in many countries. They are especially tricky in Colombia. The standard VAT rate is 19%, one of the highest in Latin America, but the list of exemptions, which includes milk, eggs and visits to the doctor, is long. This is supposed to help the poor, but the rich benefit more. Salmon, which is imported and therefore expensive, is not taxed. Coffee and soap, which almost all Colombians use, are.
Luis Alberto Rodríguez, who as director of national planning manages public investment, says it has been “our obsession” to correct this unfairness. Income inequality is the highest in the OECD, a club of mostly rich countries. Colombia’s taxes and transfers do less to correct this than in any other member country (see chart). VAT exemptions and reductions are also expensive. They cost the government the equivalent of 6% of GDP, more than in any other Latin American country.
In the early 2000s Alberto Carrasquilla, the finance minister, wanted to give rebates to poor people for the VAT they paid. That would have allowed the government to shorten the list of exemptions, boosting its revenue. But politicians objected, because VAT exemptions are popular. The government lacked the information it needed to compensate the poor.