Internal Assessment:

Commentary 1
COLEGIO POLITECNICO
CandidateName: Luis Andrs Zurita Riofrio
IB Code: 001110-0098
Date: 15 September 2014
Section 2 Macroeconomics
Word Count: 750
Source: Reuters News, 8 September 2014.
Colombia proposes increasing tax on wealth to
2.25 pct.

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Colombia proposes increasing tax on wealth to

2.25 pct.
BOGOTA, Sept 8 (Reuters) - Colombia's government is proposing to raise its tax on wealth and
extend a financial transactions tax, Finance Minister Mauricio Cardenas said on Monday, to
finance government spending in 2015.
Cardenas said the proposal to raise the tax to 2.25 percent from 1.5 percent would apply from
January next year and require the approval of Congress. President Juan Manuel Santos's
majority backing in Congress makes approval likely.
"With these taxes, we will raise 12.5 trillion pesos ($6.43 billion) which is what we need to
complete financing for the budget that we'll present to the Congress," Cardenas said.
The draft budget for next year foresees spending of 216.2 trillion pesos that will require a fiscal
deficit equivalent to 1 percent of GDP, in part due to a drop in government revenue from lower
oil output this year.
The tax increase would be applied on wealth of 750 million pesos or more, Cardenas said,
down from 1 billion now.
The tax would start at 0.4 percent for assets totaling up to 3 billion pesos as calculated on Jan.
1 each year, then 1.1 percent up to 5 billion pesos, the vice minister of finance, Andres Escobar,
told reporters on Monday evening.
Between 5 billion and 8 billion pesos, a 2 percent rate would apply, followed by a top-tier 2.25
percent rate on larger amounts. Deductions would be made for investments in property and
certain financial assets such as stocks.
The sliding scale tax would be applied in tranches meaning for example, an individual or
company with 10 billion pesos assets would pay the minimum rate on the first 3 billion, then the
1.1 percent and 2.25 percent rates on the rest.
Cardenas said Colombian individuals and companies with assets abroad will have to pay taxes
and he said the government was considering raising sales tax paid by consumers though no
decision had been taken yet.
Cardenas said that the government was still proposing to extend a tax of 4 pesos per 1,000 on
financial transactions, which is charged on withdrawals from bank accounts and other
operations and was first introduced in 1998.
Colombia's government has been concerned about the impact on finances this year of falling
output of its biggest export, oil. Attacks in 2014 on oil industry infrastructure have shut some
pipelines for longer than usual.
The Andean nation's economy has been accelerating nonetheless and the official target for
expansion in 2014 is 4.7 percent. Coal production in the world's fourth-biggest exporter is
expected to rebound after turmoil in the sector last year and the coffee harvest is expected to be
large.
($1 = 1940.89 Colombian Pesos) (Reporting by Carlos Vargas and Luis Jaime Acosta; Writing
by Peter Murphy; Editing by Grant McCool and Lisa Shumaker)
Bibliography:

http://www.reuters.com/article/2014/09/09/colombia-tax-idUSL1N0R90ZW20140909

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Commentary
Many governments use different types of policies in order to achieve their
macroeconomics objectives. These policies include many factors that have a
big influence in the country such as, government spending, manipulation of
taxes, government budget, etc.
The Colombian government is in a deficit in part of the damage they had in the
infrastructure of its oil production. Because of that, they want to raise its tax on
wealth, financial transactions and are considering raising sales taxes paid. In
order to finance government expenditure for 2015.
Fiscal policy refers to the governments manipulation of taxes and government
spending, aimed at either increasing taxes (contractionary fiscal policy) or
decreasing taxes (expansionary fiscal policy).
A tax is a charge, placed on an individual or firm that is payable to the
government under punishment of law.
Government spending is short for gross governments investment and spending
and measure a countrys government expenditure on goods and services.
A governments budget is in deficit when the total government expenditure in a
year exceeds the total revenue through taxes that year.
The Colombian government is planning to increase the wealth tax from 1.5% to
2.25%.Basically they will apply progressive taxes; it means that when the
income increases, the percentage paid in tax also increases.Colombia
governments wants to apply this system because is a good way in which the
can obtain revenues to finance its budget.
The government gives tax payers the option for people to reduce their tax
percentage, through investment in property they have and also through
investment in companies shares and stocks.

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In the diagram A, the AD curve moves to the left of AD1 to AD2, because when
increase the taxes, consumption may decrease.

But the government turn

promotes investment, giving it the opportunity for people to re-invest more in his
country. And as we know if investment increases, this will cause the aggregate
demand of the country also increased. Occasioning that Ad curve might moves
to the right of AD2 to AD3.
The increase in aggregate demand through investment in smaller proportions
may occurs because only a small percentage of Colombian population are able
to invest, and make that reduce their tax percentage. As government will aplly
this taxes to everyone, the majority of Colombian population that are not able to
invest, could be affected, and this may cause that massive consume reduces,
making that AD curve decrease in a major proportion than it increases through
investments.
The government is considering in raising sales tax paid by consumers. This
type of taxes are indirect taxes, these are paid by households through an
intermediary such as retail store. Most of the indirect taxes are regressive taxes;
it means that when the income increases, the percentage paid in tax also
decrease.

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In the diagram B we can notice that sale paid taxes are imposed, the market will
shrink in size, decrease in quantity demand, thus possibly lower the level of
employment in the market, since firms might employ fewer people. Demand
Curve shifts up because it increases costs of production.
The implementation of progressive taxes in the Colombian government has
different effects in the stakeholders. One of those stakeholders is the
government,this benefits because it increases the revenues to finance its
budget. It also has different effects on firms when implementing these taxes,
could affect the level of investment because just a small percentage of the
population invest in the country. Other stakeholders such as consumers may be
affected. Because if the level of investment by households decrease, basically
production might decrease too. Making that the level of employment also
decrease.
On the other hand, there are some effects on stakeholders, if Colombian
government decides to implement regressive taxes. An increase in sales taxes,
According to the economics theory consumption might decrease. And probably
reduce market size.
In comparison, in both progressive and regressive taxes, the Colombian
government will benefits, because they will get revenues which uses to finance
its budget. Also producers suffer because as the level of investment decrease
they mightproduce less.

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Colombiangovernment is planning in a short run, because they need to take

actions immediately to finance their budget in 2015. But it may have some
effects in a long run if they implement these kind of taxes, because it

is

possible that the invest dont be in a big proportion, which would make that firms
produce less and might increase the level of unemployment. And in this way if
they implement sale tax paid, inflation in a long run may increase.