The country's tax system is reaching its limit and cannot withstand another reform

Colombia is facing a point of exhaustion in its tax model, according to economist and former director of the DIAN, Jairo Villabona Robayo, director of the Fiscal Studies and Equity Group (GEFE) of the National University, who in his most recent report concludes that the Colombian tax system "no longer has the capacity to correct itself" and needs to work with what it has, but doing things right.

In a recent report, this analyst asserted that while there are multiple reasons for this situation, the diagnosis is clear: the country combines low tax revenue, excessive tax expenditures, widespread evasion, and a weak productive structure that limits the tax base. Simply put, the government collects too little, grants too much, and spends more than it can sustain.

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First, the study notes that the fiscal deficit has almost doubled since 2019, going from moderate levels (2.4% to 4% of GDP) to historic figures of between 4.2% and 7.8% of GDP in the last five years; although it acknowledges that during the pandemic, the Government had to increase spending to cover subsidies, stabilize fuel prices and pay debts with Ecopetrol and the International Monetary Fund, which brought net debt to 60% of GDP, a jump of 12 points compared to 2019.

In this regard, he notes that although those decisions prevented a larger crisis at the time, they left a trail of fiscal vulnerability; it should not be overlooked that the payment of obligations to the Fuel Price Stabilization Fund (FEPC) alone has cost more than $80 trillion since 2022, in addition to $18 trillion in energy and gas subsidies, and $30 trillion in the loan from the IMF. These three items alone exceed the annual budget of the education sector.

“The country will not be able to recover fiscal sustainability if it does not take fundamental measures to increase real revenue and rationalize tax benefits, which today erode a large part of potential income,” Villabona stated.

Tax spending: the invisible hole

When discussing the causes of this fiscal strain, the analysis highlights a significant factor: Tax Expenditure, that is, the revenue the State forgoes due to exemptions, deductions, discounts, or special rates. According to the GEFE, this is the main factor that has pushed the system to its limits, given that in Colombia, its magnitude is exceptional, reaching approximately 8.8% of GDP, equivalent to $135 trillion, more than double the Latin American average (4.7%).

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“The country loses the most revenue due to tax breaks in all of Latin America. A large part of these benefits are concentrated in specific sectors, such as hotels, construction, and agribusiness, and many are maintained without an evaluation of their effectiveness or social impact,” Villabona emphasizes.

To elaborate on their point, they noted that in 2022, tax expenditures represented 56% of the system's potential revenue, meaning that for every 100 pesos the State could collect, it loses $56 due to legislative decisions; while in VAT alone, exclusions and exemptions cost $77 trillion, and in corporate income tax the fiscal cost reached $28 trillion.

Furthermore, they warned that the Colombian tax model does not comply with the principles of equity or progressivity, since the tax burden is distributed inversely to the economic capacity of the taxpayers and while in the OECD, the income tax of individuals represents 83.5% of the total collected and that of companies only 16.5%, in Colombia the opposite occurs.

“Here, individuals pay 18.4% and companies 81.6%. In other words, the system relies on the formal productive sector, while higher-income households contribute proportionally less, resulting in a regressive structure where indirect taxes like VAT weigh more heavily on low-income households, and where taxation fails to reduce inequality,” the report states.

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They also pointed out that effective tax rates are highly disparate, citing data from the Colombian Tax and Customs Directorate (DIAN), and noted that in 2019 the financial sector paid an effective rate of 16.1%, while the nominal rate was 33%. In contrast, agriculture and manufacturing paid around 24%, concluding that the current system rewards intermediation and penalizes production.

Evasion and institutional weakness

Adding to this picture is tax evasion, which Villabona estimates at between $90 and $100 trillion annually, equivalent to 5.4% of GDP. Nearly $46 trillion is evaded annually in corporate income tax alone, and $30 trillion in VAT; for reasons ranging from weak administration and low probability of sanctions to regulatory complexity and a culture of social tolerance toward tax fraud.

“Although Law 1819 of 2016 criminalized tax evasion, the penalties are so high, exceeding 1,000 minimum wages, that most cases go unpunished. Colombia prioritizes revenue collection over punishment. Tax evaders can reach an agreement with the DIAN (Colombian Tax and Customs Directorate) and avoid jail time by paying what they owe, a practice that discourages voluntary compliance and keeps impunity at levels close to 90%,” they emphasized.

Another symptom of the model's exhaustion is its regulatory instability, a point on which they noted that although between 1990 and 2022, Colombia has approved 22 tax reforms, one every year and a half, none has managed to sustainably increase revenue or tax pressure, which remains below the regional average.

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“While countries like Mexico or Chile implement reforms every decade with a structural vision, Colombia has turned taxation into a fiscal emergency mechanism. A well-designed system doesn't require constant adjustments; when it's constantly being reformed, it's because it's not working,” Villabona warns.

Finally, while the analysis argues that all of the above leads to volatility that erodes taxpayer confidence, generates legal uncertainty, and fosters evasion, it draws attention to the technological and management shortcomings at DIAN; given that the entity currently operates with more than 23 disconnected information systems, which generates errors, slowness, and security risks.

“The modernization process, financed with a US$250 million loan from the Inter-American Development Bank (IDB), aims to digitize and unify tax information, but progress is still only partial. The lack of traceability and manual processes limit oversight and facilitate tax evasion,” they concluded.

In response, the experts from the GEFE Group concluded by emphasizing that it is not just about updating equipment, but about building an institutional culture of integrity and control, with trained personnel and artificial intelligence tools that allow the identification of risk patterns in real time.

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Thus, the document concluded by stating that the country needs a comprehensive redesign that combines efficiency, equity, and sustainability, with real control over tax expenditures, effective prosecution of tax evasion, and an industrial policy that broadens the tax base. It also emphasized the need to acknowledge the mistakes it is making and to plan solutions based on its production model. Daniel Hernández Naranjo

Portfolio Journalist