April 25, 2024


A Progressive Tax Reform?

An interview with José Antonio Ocampo, Colombia’s former Minister of Finance

In 2022, Gustavo Petro, Colombia’s first left-wing president of the twenty-first century, emerged victorious alongside a coalition of liberal ministers experienced in the public sector and academia. One key figure in this coalition was José Antonio Ocampo, an academic with several political appointments over the past three decades, who served as Colombia’s Minister of Finance during the first year of Petro’s term.

Ocampo was a leading participant in Petro’s tax reform, the only ambitious bill supported by the president that managed to gain Congressional approval in November 2022, when the government had just began its term. The reform aimed at raising approximately 20 trillion pesos ($5 billion) on average between 2023 and 2026, the equivalent of 26 percent of the government’s public investment budget.  

Today, Ocampo is a professor at Columbia University, where he is Co-Director of the Economic and Political Development Concentration in the School of International and Public Affairs. He served as director for the Center for Studies on Economic Development at the University of the Andes, a private university in Bogotá. He began his political career in 1992 as the Minister of Agriculture for the Liberal government of César Gavirio, and then served as the director of the National Planning Department under Liberal president Ernesto Samper in 1994. Two years later, Samper appointed him Minister of Finance (1996–1997), where, at the height of the drug trafficking boom, he placed stronger controls on foreign financial inflows, including a requirement for foreign capital to pass through the Bank of the Republic. Ocampo’s book The Economic History of Colombia (Historia económica de Colombia)—published in twenty editions—remains a crucial reference for Colombian economics. 

During the 2022 presidential elections, Ocampo served as campaign coordinator and head of programming for the centrist candidate Sergio Fajardo. After Fajardo lost in the first round, then-candidate Gustavo Petro brought Ocampo to his team as Minister of Finance, a decision meant to signal seriousness around economic matters. However, the economist and sociologist lasted only nine months as the head of the ministry. His exit took place amid sudden shifts in Petro’s strategy for governance, in which Petro slammed the door to ministers of different political tendencies, favoring those with a vision of government more aligned to his own. 

During his brief tenure, Ocampo pushed forward a reform to place a heavier tax burden on the upper classes and the corporate sector, especially oil and mining companies, which, as a result of the new policy, are now projected to contribute 57 percent of national tax revenues for 2023. This contribution is scheduled to come down to 35 percent in 2024 and 20 percent in 2025. The 2022 tax reform effort can be juxtaposed with Iván Duque’s 2021 tax reform, which inspired a national strike of over two months and served as a basis for Gustavo Petro’s presidency. 

In the following interview, the former minister speaks to Camilo Andrés Garzón and María Camila González about his reading of the region’s economic growth, his tenure in Petro’s government, and the debates around progressive taxation.  

An interview with José Antonio Ocampo

Camilo garzón: Across Latin America, there has been discussion around the role of the state in reducing inequality and stimulating economic growth. In the case of Colombia, President Gustavo Petro has insisted that increased state intervention is necessary to address these challenges, while other governments in the region, like Javier Milei in Argentina, have chosen the opposite path. What are your thoughts on this debate?

José Antonio Ocampo: Without a doubt, the question of reducing inequality presumes state intervention. In developed countries, for example, a mix of progressive taxation and dedicated social spending for middle and impoverished sectors is used to tackle inequality. 

The data available for Latin America shows that the region makes use of public spending, though much less than developed countries. Taxes, meanwhile, are hardly utilized. In other words, the taxation system is not progressive. In Latin America, the value added tax (VAT), which is added to the payment for goods or professional services, reflects this system. VAT can even be called a regressive tax, as impoverished sectors spend a higher proportion of their income on consumption, and thus end up paying a higher proportion of value added tax. On the other hand, personal income tax, a form of progressive taxation, is not predominant in Latin America. 

The other question is what determines economic growth. Here the debate has to do with the effectiveness of market liberalization reforms, which occurred in Colombia in the 1990s. I believe the evidence from Latin America suggests that such reforms have produced very little positive effect, and even a negative effect. 

During the period of industrialization in Latin America, from 1950 to 1980, the regional economy experienced, on average, an annual growth rate of 5.5 percent. From the market liberalization reforms of 1990 until 2023, the region grew 2.5 percent. In fact, from 2014 to 2023, the average annual growth rate was barely above 0.9 percent. 

In other words, economic growth has not taken place. There are many polemics regarding what happened, but I would say that today, in Latin America as in the rest of the world, there’s a consensus that the state has to intervene in what is generically known as “industrial policy.” But I prefer to call it “productive development policy,” because this intervention can also serve the primary and service sectors. 

The experience of the last decades makes it clear that the state has to intervene, and it must use several instruments, from development banks to innovation efforts, and in some cases production boosts and support for the export sector. There’s more awareness today around the importance of these mechanisms of state support. It is clear that East Asia has been the most successful region in terms of development, and there’s no doubt that state intervention made this possible. China has also had a high economic performance, making it the world’s main exporter today.

maria camila gonzález: As Minister of Finance in Petro’s government, you led a regional platform for tax cooperation with the goal of promoting a conversation around progressive taxation. How has this question advanced in both Colombia and around the world? 

JAO: There are three levels to consider. At the national level, we have the tax reform that I negotiated, which was approved by Congress in 2022. The reform aimed to induce some kind of progressive effect on the tax structure, for example, by reducing tax benefits for individuals with a monthly income higher than $2,548. The reform also included a wealth tax, a complementary tax levied on the net value of taxpayers’ assets. The reform also proposed making oil and mining companies, the largest players in the export sector, pay more taxes. According to estimates from the Ministry of Finance, 57 percent of tax revenues in 2023 came from oil and mining companies. I’ll also mention that in Colombia, 23 percent of tax collection depends on companies and 6 percent on households. This is the opposite of the situation in developed countries, where the OECD average between individuals and businesses is 24 percent versus 9 percent. 

Proposals for a global minimum tax have been developing over the last decade. In 2021, the OECD established what they call the Two-Pillar Approach to global tax reform. Since then, the agreements have been signed by over 137 countries, representing 90 percent of the world’s GDP. Easiest to understand is Pillar 2, which  proposes a global, minimum tax of 15 percent on all companies that serves to protect the tax bases of the countries involved. It doesn’t eliminate fiscal competition, but instead establishes multilaterally agreed upon limitations. Pillar 1 basically requires large multinationals to distribute the taxes they pay evenly across the countries in which they operate. The idea is for Pillar 1 to reallocate taxing rights on more than $125 billion each year to jurisdictions, and for Pillar 2 to generate new tax revenues of $150 billion per year worldwide. 

The problem is that Pillar 1 only applies to very large companies, limiting its reach to approximately just 100 around the world. Developing countries don’t gain much. In response, African countries have promoted a process to generate the UN Framework Convention on International Tax Cooperation, with an even broader agenda in the works, which includes a wealth tax and regulations for tax havens. 

My idea was to create, at the intermediate level, a mechanism of regional cooperation that would allow Latin America to do what this international agreement is trying to do—share data between tax authorities to increase the collection of taxes across the region. It would also prompt the important question of making information about suspicious contributors available to tax authorities. 

Cg: If the need for more progressive taxation—like a personal income tax—is so urgent, why has it been so difficult to pursue in Latin America?

JAo: The most complicated and important issue within the debate around progressive taxation is the question of VAT versus personal income tax. In general, the VAT is a regressive tax, and it disproportionately burdens median and low income taxpayers. In contrast, the income tax is progressive, but systematic evasion—including moving money to tax havens—means that places like Colombia and the region more generally have struggled to collect this revenue. 

An additional consideration has to do with the key variable of the labor market. An improvement in labor market conditions—either through a reduction in unemployment, more job opportunities for women, or a decrease in labor informality (which is very high in Latin America, in Colombia around 60 percent of employment is informal)—tends to have a progressive effect on taxation and income distribution. The recent history of Latin America demonstrates this reality. The years with the greatest distribution of income across all countries in the region—2002 to 2003 and 2013 to 2014—correspond to the years with the greatest economic growth and the best labor market performance. In other words, good labor market conditions are at least as important as public welfare in improving the distribution of income. 

mcg: What do you think of the social reforms proposed by Petro’s government, which aim to modify the role of the state in healthcare, pension redistribution, and the labor market?

JAo: The proposed reforms have triggered various polemics. The first thing to highlight is that there are undoubtedly progressive impacts in some more than others. The pension reform will have the greatest impact, because it seeks to address a huge gap in coverage—today, only one out of four senior adults in Colombia has a pension. The reform also seeks to provide an end-of-life income to people who are not able to retire, which will help eliminate extreme poverty among older adults. 

The progressive nature of other reforms is more debatable. The healthcare reform proposes to focus on disease prevention, giving private companies a secondary role in the administration and management of health resources. Overall, it aims for the healthcare system to remain in the hands of the state. 

In Colombia, everyone has an equal right to healthcare, so in principle, everyone has access to the healthcare system. But as the Petro government correctly notes, the problem is that primary care varies widely across rural sectors or remote areas far from health centers. The reforms seek to address this situation, and if successful, they would help reduce inequality. But there’s also a question of the state’s role in managing the healthcare system. Should the state be in charge? Will this improve the system? I have my doubts. I don’t think the government has the capacity to manage our complex healthcare system.

The labor reform is also controversial. Some aspects of it may be considered progressive, since it gives greater labor protection to certain sectors. But my first concern is that it makes labor more expensive, which will increase informality and have some negative effects. Salaries in the formal sector would have to remain low. My other concern is that the reform includes regulations to strengthen unions and make dismissals more difficult under certain conditions. These changes are not necessarily progressive, because unionized workers in Colombia do not make up the most impoverished sectors, who remain excluded from the reform. 

Cg: These ambitious, progressive reforms have been difficult to pass through Congress, especially amid expected tensions with private actors such as healthcare companies and private pension funds. Is the battle worth the wear and tear in Congress?

JAo: I managed to pass the tax reform. Reforms can pass if there’s interest in negotiations. My diagnosis is that there’s no real interest in negotiating the healthcare reform, and this is the reason for its failure. The Colombian system of Health Promoting Entities (Entidades Promotoras de Salud, EPS), in which private companies provide a basic health plan to their affiliates, has an 80 percent popular approval rating. The system is considered very poor in terms of access, but compared to the globe, Colombia is one of the few countries that effectively has universal access to healthcare. 

The EPS has been in place since 1993. At that time, the liberal government of César Gaviria and his minister Gabriel Londoño proposed to imitate the Chilean health system, where you are required to buy health insurance, and the quality is dependent on how much you pay. Thus, higher-income sectors had better insurance than lower-income sectors. We fought for the benefit to be the same for everyone, contrary to the original proposal. Everyone contributes proportionally to their income, but the benefits are equal for all. Additionally, a subsidized system was created to cover health insurance costs for those lacking a formal job. 

I do not agree with the Petro government’s former Minister of Health, Carolina Corcho, who says that there is no guaranteed right to health in Colombia. Of course, there is a lingering problem–—rural and impoverished sectors do not have equal access to health services. This needs to be improved, but, in my opinion, it could be achieved without healthcare reform. The 2015 statutory health law, which recognizes health as a fundamental right and lays the foundations for guaranteeing it, includes public policies aimed at reducing inequalities in the social determinants of health. 

mcg: President Petro has recently spoken about reforming the 1991 Constitution, in order to form a popular mandate that would allow more people to retire and reduce national inequality. How could those changes be pursued? 

JAo: In general, several policies sought by the government could be achieved through laws and public spending, and they don’t require amending the Constitution. Of course there are many gaps, and we continue to be a very unequal society with high poverty and a lack of universal access to social and public services. But several policies and the expansion of social spending, which have all occurred within the Constitutional framework, have generated progress. Multidimensional poverty has decreased from 60 percent of the population in 1997, when it was first measured, to 13 percent.  

Some changes proposed by Petro do require a constitutional reform, like the question of decentralization. But even agrarian reform can be achieved without a constitutional amendment. As Minister of Agriculture, I promoted the current Law 160 of 1994, which allows for large-scale transformations in the countryside through the National Agrarian Reform System and establishes subsidies for land acquisitions.  

The problem is the provision of resources to the National Land Agency, which allows it to buy land for redistribution. In fact, this is what the Petro government is trying to achieve now. When I was Minister of Agriculture, the National Land Agency’s budget for buying land for redistribution saw the largest increase. 

While some policies require a constitutional reform, most of them instead need an effective social policy. I agree with political analyst Rodrigo Uprimny, who pointed out that the President’s proposal is “unnecessary, inopportune, contradictory, unfeasible, and therefore risky.” This is why I believe it is necessary to take care of our monetary policy as well, which according to the Constitution, must be coordinated with the general economic policy. To apply this principle, the Constitutional Court has already determined in a 1999 ruling that monetary policy must take into account its effects on employment and productive activity. 

Cg: Petro came to power with the promise of pursuing the energy transition, but he has delayed some renewable energy projects. At the same time, the government has not decided if it will explore new hydrocarbon deposits. You have said many times that they will.

JAo: I do believe that climate change has made the green transition a global question. I spent ten years between the United Nations and the Ministry of Agriculture working on the creation of the Ministry of the Environment. When I became Minister of Agriculture, environmental management was still under the jurisdiction of Inderena, an institute attached to the ministry, and we proposed to establish a new Ministry of Environment. All of this is to say that I’m very sensitive to this question, and recognize the urgency for a green transformation of the economy. 

The problem is—who should be in charge of it, what can be done and what should Colombia do? The country produces 0.6 percent of the world’s oil, meaning that if it stops producing, its supply would be quickly replaced by another producer. Decreasing national oil production does not matter in terms of global climate change. And as I argued in intra-governmental debates, we must consider three transitions: the green transition, the export transition, and the fiscal transition. We depend on oil for all three. If we stop exporting oil, we have to export something else, but we are still lacking a similarly profitable equivalent. 

When it comes to the national budget, individuals who sell oil are important for income tax revenue, as are Ecopetrol’s profits. As a result, oil management must be cautiously included in the energy transition. There were internal conversations around respecting the signed contracts—numbering over 200 at the time—for hydrocarbon exploration. 

The main obstacle for clean energy projects has been the approval of transmission networks, mostly due to disagreements with the indigenous population of La Guajira. As a result of issues with the transmission network, many companies have abandoned solar projects in La Guajira. The lack of a guaranteed transmission grid slows down the entry of renewable energy projects into the country.

mcg: You’ve stated before that your time in the Petro government was one of the toughest periods of your life. What legacy do you see from your time as Minister of Finance? 

JAo: The Duque administration left us with monstrous economic imbalances, a large fiscal deficit, including a rising deficit in the Fuel Stabilization Fund, and a huge amount of public debt. There was also a balance of payments deficit, over 6 percent of GDP in 2022. The only other year during which we had a similar deficit was in 2015. But oil prices were at rock bottom then, while prices in 2022 were soaring. 

The Petro government arrived to power under these difficult conditions, along with other structural factors, such as inflation derived from Russia’s invasion of Ukraine. In fiscal matters, the public debt of the national government that I entered in 2022 was around 60 percent of the GDP. When I was Minister between 1996–1997, public debt was at 20 percent.  

Fiscal debt, inflation, and the balance of payments deficit were complex situations. We faced the task of reducing these economic imbalances. Achieving that goal, alongside passing the tax reform, were my main two accomplishments as minister. Fortunately, the management of these imbalances has continued after my departure.

Cg: What is your general view on the cooling of the Latin American economy this year?

JAo: I published an article in January where I refer to “Latin America’s second lost decade.” In the paper, I demonstrate that between 2014 and 2023, the average annual growth rate for the region was barely above 0.9 percent, worse than the average of 1.3 percent during the 1980s, a period which earned the regional title of the “lost decade.” This most recent moment has been a huge failure for Latin American economic growth. It is true that this diagnosis varies across regions, some Central American countries and Mexico had much higher growth rates than South America in 2023.

Although foreign direct investment has remained robust, borrowing costs have increased. Consider the global context of low growth in trade volumes, which have been stagnant for the last two years, following the pandemic. The situation should prompt regional leaders to focus on productive development policies that promote dynamic sectors of the economy. This could help avoid continuous turmoil, especially given the continental predicament of frequent macroeconomic crises, with Argentina as the most dramatic example.

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