Can Colombia Show the Rest of the World How to Tax the Rich?

he politics of austerity suffered a significant setback in Colombia. After three months of debate and negotiations, President Gustavo Petro achieved a major legislative triumph in November when Congress passed his ambitious tax reform bill.

The new tax regime follows a very straightforward principle: those who earn and own more, pay more.

While the $20 trillion Colombian pesos (COP) - or approximately $4 billion US dollars (USD)- that the government expects to collect as a result of the tax reform bill is considerably less than the $50 trillion COP it hoped to initially raise, the bill endows the state with additional resources it needs to fulfill the administration's campaign promises of financing social programs that seek to end hunger and close historic inequality gaps.

The plan increases corporate taxes and imposes higher duties on windfall gains from coal and oil, but the highlight of the reform bill is undoubtedly the establishment of a permanent progressive wealth tax. This is very much a necessary measure, especially when taking into account the extreme levels of wealth concentration that exists in Colombia.

The top one percent of the country's population possesses $229.7 billion USD, or 37.3 percent of Colombia's total wealth, which is currently at $616 billion USD for 2021. The top ten percent has nearly three-quarters of the nation's wealth, meanwhile the bottom half of the population retains a mere 1.6 percent.

A wealth tax can help reverse these extreme material inequalities, but only if it is effectively designed. A short paper published earlier this year by Emmanuel Saez and Gabriel Zucman examined the history of progressive wealth taxation in Europe. They called attention to the fact that the wealth thresholds set in a number of European countries were simply too low. The upper-middle-classes - whose main and most valuable asset is their home - were impacted and, as a result, cash poor households were burdened with a new tax obligation they had difficulty paying.

It is no surprise then that the implementation of a wealth tax in Europe was unpopular. Challenges in liquidity generated demands for primary homes and other non-income producing assets to be exempt. These exemptions were granted and later exploited by the ultrawealthy, eroding the tax base and hindering the state's ability to raise any significant revenue.

The design of Petro's wealth tax avoids these pitfalls by targeting the people who sit at the very top of the wealth distribution. Its application begins to affect individuals with a net worth of at least $600,000 USD. This is one hundred and twenty-three times greater than the median wealth per adult in Colombia and represents less than one percent of all people in the country.

The annual wealth tax of the reform bill has three marginal tax rates: The first is an annual tax of 0.5 percent on wealth over $600,000 USD; the second is a 1 percent annual tax on wealth over $1 million USD; and the third is a 1.5 percent annual tax on wealth over $2 million USD. This last bracket, however, is temporary and will expire at the end of 2026. According to the government's own estimate, they expect to collect approximately $319 million USD in revenue after the first year of implementation.

One of the challenges for the Petro administration is to curb the activities of the wealth defense industry and their use of tax shelters to hide the assets of the most economically privileged. Colombia's Director of the National Directorate of Taxes and Customs estimates that $16 billion USD worth of tax revenue is lost each year to tax evasion, $6.9 billion of which comes from individual evaders. The reform bill will empower the state to levy fines and mete out jail sentences to repeat evaders to combat this phenomenon.

This helps explain why the Colombian state is underestimating the amount of revenue it could collect from a wealth tax. An updated analysis by the Institute for Policy Studies - taking into account the new wealth tax rates presented in the reform bill - demonstrates that the state could raise more than $1.4 billion USD in revenue if implemented today on the country's 4,700+ richest.

As economist German Machado commented to Argentine newspaper Infobae, a successful campaign against tax evasion could effectively double the total revenue the reform bill expects to collect.

The tax reform bill generated lively public debates. Some critics aimed at the utility of a tax on sugary drinks and ultra-processed foods while others lamented the fact that the reform bill did not represent a structural change in the tax code that expanded the country's tax base.

The Colombian opposition - led by el Centro Democratico - attempted to mobilize popular resistance to the bill, but failed to generate much enthusiasm. A march was organized in late-September, but turnout was modest at best. And the public simply did not buy into the misleading messaging campaigns that attempted to collude the top one percent of income earners with the middle-class.

A recent poll demonstrated broad public support for the tax reform bill. 65 percent of those surveyed approve of it. This very much signals a new era of politics where austerity is rejected in favor of more economic democracy, one that translates into more opportunities and less wealth concentration.

We are exiting the era of Hayek and Friedman and entering the epoch of Piketty and Mazzucato. The Colombian people want to tax the rich, and we should too.