The Colombian quilting bee

COLOMBIA - Report 21 Dec 2018 by Andres Escobar, Juan Carlos Echeverry and Mauricio Santa Maria

​According to the Merriam-Webster dictionary, a quilting bee is “a social gathering of women at which they work together at making quilts or doing other quilted work”. If the word “women” is replaced by “members of Congress”, we get a pretty good description of what happened with the tax reform (aka financing law) recently approved by the Senate on December 18 and the House on December 19. Indeed, if one reviews the process that took place between the initial bill submitted by Minister Carrasquilla and the end result approved this week, we think the term “quilt” applies quite nicely.

The heart of the initial reform, i.e. completely revamping the Colombian VAT system, fell off the train relatively early, not without dealing a huge blow to President Duque’s popularity and dramatically cutting the expected revenue from the reform. In addition, the revenues coming from “normalization” (tax amnesty) and strategies to handle tax evasion were halved, according to the Ministry of Finance’s estimates from COP 2 tn to COP 1 tn. In sum, as Table 1 shows, from the proposals initially submitted by the government in October, which were expected to yield COP 14 tn (1.4% of GDP), only COP 3.7 tn (0.37% of GDP) made it to the approved version. This means that COP 10.3 tn (1% of GDP), almost 75% of the revenue-enhancing measures proposed by the Government, vanished along the way.

This was not the end of the story, though, as Congress knew quite well such a reduction in additional revenues coming from the reform would mean considerable spending cuts next year. Members of Congress in charge of organizing the version to be discussed (the “ponentes”) decided to partially offset the loss in revenues, but on their own terms, and this is where the quilting bee started: multi-stage VAT for sugary drinks and beer; excise taxes on home sales and motorcycles; taxes on dividends paid and profit remittances, and; a temporary income tax surcharge for financial institutions.

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