Revisiting the Distributive Impacts of Fiscal Policy in Colombia

Colombia is one of the most unequal countries in the region and the world. Given theredistributive role of fiscal policy, this study uses recent data from the 2021 Integrated Household Survey to explorethe impacts of taxes and spending on poverty and inequality in Colombia. The study introduces innovations to theliterature on Colombia, including an update of the fiscal microsimulation model to reflect the most recent economiccontext; an introduction of new fiscal policy parameters, such as gasoline subsidies and carbon taxes; andmethodological improvements. The results show positive redistributive impacts, but these are considerably lowerthan those seen in other counties members of the Organisation for Economic Co-operation and Development(OECD). Direct taxes and transfers reduce the Gini index from 0.543 to 0.505; and direct taxes, indirect taxes,subsidies, and monetary transfers reduce total poverty from 42.1 to 40.2 percent and extreme poverty from 16.1 to 11.7percent. Direct taxes, transfers, and subsidies are progressive and contribute to poverty reduction, whileindirect taxes such as the value-added tax or consumption tax are regressive and do not reduce poverty. This reflectsa tax system that is progressive, but not progressive enough (with a low proportion of the population with high levels ofincome contributing), and cash transfer and subsidy programs that have room for improvement in their targeting.