Colombia needs a tax paradigm shift

When analyzing the size of the Colombian state, the first step is to clarify which state is being discussed, because public spending is measured in three different ways and each tells a different story. On one hand, the central government consists of ministries, national entities, and debt service, where the recently approved general budget represents close to a third of gross domestic product. On the other hand, the general government incorporates regional departments, local municipalities, and social security, serving as the international metric used by organizations such as the World Bank or the Organisation for Economic Co-operation and Development, whose indicators show that this consolidated spending exceeds 49 percent of gross domestic product and sits comfortably above the average of developed economies. Finally, the consolidated public sector, which also includes state-owned enterprises, provides the broadest measure, although it rarely enters the public debate.

This difference is not a mere technicality, as while the country discusses the accounts of the central government, the state apparatus as a whole consumes nearly half of what the national economy produces, and a large portion of those resources are managed outside of Congress, in the regions and within social security systems. A state of such dimensions requires a broad and solid tax base to sustain itself, and Colombia lacks one.

Tax collection is low not because citizens refuse to comply, but because the productive fabric is predominantly informal and a significant portion of the population lives in conditions of poverty or vulnerability. Taxes can only be collected where there are formal incomes and accounting records, and in the country an enormous portion of economic activity lacks both. For this reason, the tax burden ends up falling exclusively on those who are visible, wage earners and formal businesses.

These businesses correspond in their vast majority to micro, small, and medium-sized enterprises, representing more than ninety-nine percent of the business fabric and close to seventy-nine percent of national employment. They are not large corporations backed by teams of tax specialists, but rather small shops, workshops, restaurants, and family businesses operating with very tight margins. Consequently, the population with lower incomes and the smallest businesses bear an excessive tax burden, while a considerable fraction of the economy operates on the margins of the system. This consolidates a vicious circle where high taxes discourage formalization, informality reduces collection, and the drop in collection leads to demanding more from the usual taxpayers.

Added to this panorama is the fact that we have reached an extreme point where practically every activity carried out by Colombians has some kind of tax behind it. Along the supply chain, from the purchase of inputs to the delivery of the final product, taxes are paid over and over again at multiple moments, which noticeably drives up costs and hinders families' access to fundamental goods and services. Coupled with this, there is a marked culture in Colombia of applying cross-subsidies across countless public services, giving rise to hidden contributions and parafiscal charges that are rarely taken into account when calculating the true tax burden supported by society. Taxes do not depend on a single authority, but rather on three levels of government, the Nation, the departments, and more than one thousand municipalities, each with its own regulations, rates, and procedures. No one calculates the cumulative impact of these obligations. As a consequence, society bears a tangle of taxes upon taxes that worsens when accumulated capital and savings, forged with care after paying this entire fiscal burden, end up being destroyed and practically expropriated by the state itself. Institutions remain unaware of the real tax burden borne by individuals and businesses, losing the capacity to evaluate whether they are destroying household welfare or annihilating business survival.

Behind this disorder operates a markedly anti-technical tax structure that must be studied and, above all, corrected immediately. Taxes should not respond to the fiscal urgency of each term, but rather be governed by clear principles that Colombia systematically breaches. The first demands that taxes stimulate economic development, but in the country they make hiring, formalization, and growth more expensive, making it more profitable to remain small and informal. The second seeks to ensure taxes are not distortive, understanding distortion as the direct impact of taxes in artificially altering prices, household consumption decisions, and business production choices, so that daily decisions are driven by fiscal pressure rather than natural efficiency. The third dictates that taxes must not deteriorate welfare but rather increase it, yet in Colombia this principle is violated by neglecting the quality of public services and excessively burdening visible taxpayers. The fourth establishes that wealth must not be destroyed, but in practice taxes are demanded even when businesses record losses or when accumulated savings are punitively penalized, forcing entrepreneurs to sell assets, cut investments, or close down. The fifth points out that taxes should be few, simple, and easy to collect, demanding a radically simpler system that eliminates the current complexity of hiring advisory services just to understand obligations. The sixth demands respect for economic and contextual stability, whereas in the country the rules of the game are modified through constant reforms, generating widespread uncertainty that is punished with lower investment and slower economic growth.

For these reasons, a paradigm shift is imperative to stop cold, without further excuses, this permanent dynamic of seeking to levy more and more taxes. The massive resources already extracted from households and businesses must suffice. For decades the same repetitive formula has been applied, in the face of rampant spending, a tax reform is promoted, special exemptions are negotiated, a tariff is raised, and two years later the fiscal deficit reappears. Repeating this cycle while expecting different results lacks strategic logic. It is imperative to transition toward a model where public spending is substantially lower and priority is given to broadening the taxpayer base rather than increasing rates. It is necessary to radically simplify the three tax levels, accurately measure the real fiscal effort, and ease the pressure on citizens and businesses to allow them to grow. All of this must be accompanied by economic and contextual stability and higher quality in spending, because no one pays taxes gladly when they perceive that resources are wasted or destroy the country's wealth.

No nation achieves development with a massive informal economy and a state that consumes a disproportionate share of national wealth without returning welfare to those who finance it. Colombia has the opportunity to overcome this course, but it requires abandoning the recipes of the past to adopt greater technical rigor, long-term vision, and less improvisation.

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