When Colombia’s new leftist president, Gustavo Petro, unveiled a plan to impose a wealth tax on the rich just hours after being sworn in, the alarm bells rang only so loudly in the fashionable neighborhoods of Bogota and Medellin.
This sort of tax is nothing new here. The country has had one, on and off, for decades. And besides, at first blush, this one looked an awful lot like the old ones: a 0.5% tax rate on assets above about $600,000 that would climb to a 1% rate on assets over $1.1 million.
But a closer review reveals a critical difference that makes this tax markedly more potent, so much so that it could — in conjunction with another Petro proposal in the works — drive up taxes on the wealthiest by about 200%. The bill would force the rich to declare their assets at current value, unlike the old law, which allowed them to report assets at their original purchase price.
If approved by congress as such, it’d mark a major early legislative victory for Petro, the sort of trophy that’d show he’s serious about narrowing the gap between rich and poor in one of Latin America’s most unequal societies. Petro has boasted about how Thomas Piketty, the French economist renowned for pushing wealth taxes as a means to reduce inequality, is an adviser. Approval of the bill, though, would also almost certainly spark a rush among the rich to whisk money out of the country in a bid to hide it from the authorities.
“People are going to move extremely quickly,” said Juan Ricardo Ortega, a former head of Colombia’s tax agency. “They’re only going to catch the Colombians like me, who don’t have enough money to go anywhere.”
The bill calls for the tax to be levied on assets — such as stocks, bonds and real estate — held on the last day of the year. Ortega said that neighboring Panama, a country long used by global elites as a tax haven, is a likely destination for much of the wealth.
Read more: Petro Targets Rich Colombians and Oil Exports With New Taxes
Largest Fortune
Both Ortega and Lucas Solano, a wealth management planner who specializes in tax legislation at Credicorp Capital, landed on the approximate 200% increase estimate.
The tax bill could, of course, get watered down — or spiked entirely — in congress. But Petro, a 62-year-old former guerrilla, forged a ruling coalition by building alliances with important groups of lawmakers, including the powerful Liberal Party, that will make it easier for him to pass legislation.
The money raised from the tax bill — equivalent to 1.7 percentage points of gross domestic product in all — would help his administration fund pledges to boost welfare spending while also cutting the budget deficit, a key to calming the country’s jittery bond investors.
10,000 People
The old wealth tax first came into effect around the turn of the century. The problem with it, Ortega says, was that allowing people to value their assets at the purchase price greatly underestimated their wealth and, as a result, the taxes they paid.
For 2017, for instance, the largest fortune declared to the Colombian tax agency was about $1.5 billion, according to research by economists Luis Jorge Garay and Jorge Enrique Espitia.
That person’s name wasn’t revealed but there are Colombians who have much bigger fortunes than that. Such as Luis Carlos Sarmiento Angulo, the country’s wealthiest person. His assets were worth $12.5 billion at the end of that year, according to the Bloomberg Billionaires Index.
Some 10,000 Colombians would be subject to the new tax, according to Espitia, who works at the national comptroller’s office. That’s equivalent to about 0.02% of the population.
Petro’s bill also calls for an increase in taxes payable on dividends, effectively quadrupling the rate for those in the top income bracket to 39%, as well as a windfall tax on oil and mining companies and levies on sugary drinks and processed food. Finance Minister Jose Antonio Ocampo said last week that the government may be prepared to discuss changes to the dividend proposal.
In a sign of the alarm the legislation has caused among wealth managers, financial conglomerate Grupo de Inversiones Suramericana SA warned last week that the tax increases would accelerate the decade-long decline in the nation’s stock market.
“There’s a significant risk,” Ricardo Jaramillo, vice president of business development and finance at Sura, said in an interview, “that the equity market will practically disappear.”
