Public Goods, Taxes, and Fiscal Policy in Colombia
Public Goods and Merit Goods
Public goods are goods and services that the market alone will not provide in the quantities that society deems desirable. These are characterized as non-excludable and non-rivalrous.
- Non-excludable means it is impossible to prevent individuals from using or consuming the good or service.
- Non-rivalrous means that the use by one individual does not limit the use or consumption by other individuals.
Merit goods, unlike public goods, can be purchased individually but often need assistance from the state. This is because they generate greater collective welfare, and not everyone can afford them. Examples of merit goods include education, healthcare, and the right to a pension in old age.
Externalities: Positive and Negative Impacts
Externalities are events involving consumers or producers that generate indirect effects that the market does not value. These events can be either positive or negative, depending on the case. This is why government intervention is often necessary.
A positive externality was observed in Colombia during a frost in Brazil. The frost meant that Brazilian coffee was no longer readily available. Due to the law of supply and demand, lower supply and higher demand led to increased prices, meaning that Colombian coffee was valued higher. This was a positive externality because Colombians received much higher profits and greater demand for their coffee. As coffee is one of the country’s most important products, this externality had a positive impact across Colombia, not just on the coffee sector.
Understanding the Public Sector’s Fiscal Accounting
Here’s a breakdown of tax accounting using three definitions of the public sector:
- National Central Government (NCG): Includes the presidency, ministries, administrative departments, Congress, and public enterprises.
- Non-Financial Public Sector (NFPS): Includes all government and non-financial public enterprises that finance their operations through the sale of goods and services.
- Consolidated Public Sector (CPS): Includes public financial institutions like Fogafin, state-owned banks, other financial institutions, and central banks.
The fiscal balance showed that the NCG had a shortfall of 1.3, while the NFPS and CPS generated a surplus of 3.7 each.
Direct vs. Indirect Taxes: Key Differences
Direct taxes are levied on production factors, such as labor income and profits. They also include taxes imposed on various forms of wealth, such as land, real estate, and property. Indirect taxes are levied on transactions in goods and services. The main difference between these two types of taxes is what they are levied on.
Indirect taxes disproportionately affect the most deprived social classes, while direct taxes tend to benefit them more. For example, with the estate tax (a direct tax), those with less wealth pay less. In contrast, the Value Added Tax (VAT), an indirect tax, is applied without considering an individual’s ability to pay or social stratum.
Progressive and Regressive Taxes: Impact on Equity
Progressive and regressive taxes are closely related to equity. Progressive taxes mean that the greater the profit, the greater the tax base. Conversely, regressive taxes mean that the higher the profit, the lower the percentage of tax payable on the total tax base. Indirect taxes tend to be regressive, while direct taxes are often designed to be progressive.
Principles of Horizontal and Vertical Equity
The principle of horizontal equity states that people in similar economic conditions should contribute the same amount in taxes. The principle of vertical equity states that people in better economic conditions should contribute proportionately more.
In Colombia, the income tax faces challenges related to horizontal equity. Individuals or companies with the same taxable income may pay different amounts, depending on the economic sector or region. Regarding vertical equity, preferences given to certain business sectors, under the excuse of increased rates, can lead to inequality if these sectors are not paying in proportion to their income.
The National Budget: A Crucial Process
The General Budget of the Nation is very important for the state and must be created with caution. The Congress of the Republic plays a significant role in the budgetary process, especially during the discussion and approval stages. Congress’s decision determines whether the process continues. After execution, the control, monitoring, and evaluation phase is carried out, also headed by Congress.
While Congress is crucial, other important entities include the National Development Department, the Ministry of Finance, the Senate, the House of Representatives, and the Comptroller, among others.
Earmarked Revenues: Funding Specific Needs
Earmarked revenues refer to tax collection allocated to a specific expenditure. This is useful when a particular sector of the state urgently needs funding, potentially more than other sectors.
An example is the tax on financial movements, initially implemented as a two per thousand tax to address the financial crisis of 1998 and the weakness of the financial system at the time.