COLOMBIA - Report 07 May 2021 by Juan Carlos Echeverry and Andres Escobar

Alboroto is agitation, excitement, racket, disturbance, commotion, ruckus and finally, riot. This is what President Iván Duque and his now-ex Finance Minister Alberto Carrasquilla generated with their ill-fated tax reform proposal, aimed at redistributing income from the middle and affluent classes to the have-nots, via VAT and income tax base widening.

Labor unions and the loquacious leftist candidate Gustavo Petro grabbed the invaluable political opportunity, and called an April 29th national strike. As is common everywhere in the world, these actions can turn destructive. The protests exacerbated by Covid-19 exhaustion and the already-radicalized political atmosphere and may favor politically extreme candidates. Petro looks like a very strong candidate nowadays, and many people, willingly or not, are migrating to the idea that he may become Colombia’s next president. Fears have been waning, especially among the young, and the specter of Castro-chavismo seems less scary. Recall that there’s still one year to go before the first round of the presidential elections -- a geological eon in politics. And Colombians still seem politically confused -- a strong reason to view recent poll results with a dose of skepticism.

The Duque administration is reeling from the tax bill fiasco, an ill-conceived process marked by a deep lack of political savvy, and which ended in flames. Duque’s short but humiliating May 2nd public address, in which he asked Congress to withdraw his government’s tax reform proposal, was his government’s nadir. Carrasquilla and his reform were obvious casualties of this debacle. As the government loses one of its few heavyweights, a tax reform is nevertheless required to start much-needed fiscal consolidation, arising several obvious questions. Will there be a tax reform this year? Yes, we think, with humbleness, sensing social earthquakes under our feet. Duque has signaled what looks like an agreed-upon package, to focus mostly on measures cast as temporary, such as a temporary income tax surcharge on corporations, extension of the net wealth tax for high-income individuals, dividend taxes and income tax hike for wealthy individuals, plus austerity in government’s current expenditures. We think a package that promises to tax firms and “the rich” and focuses on government austerity should face no material resistance in Congress. Yet given the infernal scene in the streets right now, you never know. Members of Congress in the ruling coalition will be timid, to say the least. Let’s hope they summon the courage to push this forward. One important note, the government should change the transitory adjective applied to these taxes, in order to influence the credit rating agencies’ models, and the likelihood of keeping investment grade status.

New Finance Minister José Manuel Restrepo, until now the minister of trade and industry, was one of the names that made sense as a Carrasquilla replacement. An ex-academic and ex-president of one of the best universities in Colombia, he’s a good economist and an eloquent speaker who, unlike his predecessor, seems capable of sitting down with antagonists to reach workable solutions.

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