Colombia Tax Reform Seeks to Cut Region’s Highest Jobless Rate

Colombian Finance Minister Mauricio Cardenas will this week present a tax reform to Congress that seeks to cut the highest unemployment rate among major Latin American economies by reducing the cost to employers of hiring.

The proposed legislation aims to increase formal employment by reducing charges that employers must pay to fund government agencies including Colombia’s child protection agency, and an education program, and replacing the lost revenue with taxes on profits, Cardenas said. Non-wage costs are currently equivalent to 58 percent of monthly pay, according to Finance Ministry estimates.

“The tax burden that is now put on wages passes to a tax on profits, allowing labor-intensive sectors to create more formal jobs,” the Finance Ministry said in a statement. The reform also aims to cut Colombia’s inequality rate by making the tax system more progressive, Cardenas said in a presentation in Bogota.

Mining and energy companies won’t have to pay more royalties on production under the reform, Juan Ricardo Ortega, Director of Colombia’s tax agency told reporters in Bogota.

The Finance Ministry estimates that the reform will cut Colombia’s Gini coefficient, a measure of inequality, to 55.4 from 57.3. The richest 1 percent of Colombians have a higher concentration of incomes than other emerging markets such as China, Argentina, Indonesia, India and South Africa, Cardenas said.

‘Structural Unemployment’

Colombia’s national unemployment rate was 9.7 percent in August, higher than the rate in Brazil, Mexico, Argentina, Peru, Chile and Mexico, according to data compiled by Bloomberg.

The reform will also simplify Colombia’s sales tax regime, and cut tax evasion, Cardenas said.

Central bank chief Jose Dario Uribe today said that the country’s unemployment rate is one of his biggest concerns.

“It worries me that this country has such a high level of structural unemployment,” Uribe told reporters in Cali today. “These levels of unemployment, which are structural, cannot be managed with monetary policy, but with other kinds of action to make the labor market function better.”

Brazil’s unemployment rate fell to 5.3 percent in August, from 11.7 percent in August 2002, following a drive to “formalize” the work force.

The reform will simplify Colombia’s sales tax, by reducing the number of bands to three from seven. The measures will also replace the 16 percent sales tax that restaurants now pay with a new 7 percent tax, Cardenas said.

If the reforms have any impact on inflation, they will be one-off changes, so the central bank is unlikely to react, said Camila Estrada, head analyst at Helm Bank.

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