Colombia’s tax reform saga: a cautionary tale for Brazil?

Brazilian investors seem confident that the Jair Bolsonaro administration will be able to pull off a successful reform of the pension system. Unlike his predecessor, Mr. Bolsonaro appears to have the political momentum required to pass the austerity package. House Speaker Rodrigo Maia has said he expects the text to be voted on by the floor as early as May. However, doubts still linger in the minds of international investors—who fear that, once again, politicians will block the reform or approve a watered-down version of it.

Colombia, one of our closest neighbors, shows what could happen if Brazil fails to meet the markets’ expectations.

Emerging from what essentially was a 50-year-long civil war, Colombia foresees a fiscal deficit of 2.4 percent for 2019, the latest of a non-sustainable fiscal path. Last year, the newly-elected President Iván Duque, a market-friendly conservative, decided to tackle the issue through a sweeping tax reform proposal.

The bill aimed at increasing the government’s tax collection by USD 4.4 billion, raising income tax on middle and high earners from 33 to 37 percent and reducing corporate income tax from 35 to 30 percent. A controversial measure was to increase the value-added tax on a range of basic items, but offering compensation to the poor.

As it turned out, after facing fierce opposition, the approved bill was so diluted that it obtained only half of the promised funds. The final bill increased income tax on high earners, slashed tax for business and didn’t include the levy on basic goods. It managed to solve the problem for 2019,...