Julian Molano

201423908
Writing Business Communication

Critical Perspective to Monotax

Introduction
In recent years, interest has grown regarding the impact of tax reforms on the Colombian
economy. The effect of these reforms has been studied extensively in recent years, given that
the new policies have a profound effect on companies and individuals. Tax based on income
is one the most studied topics, because it generates discussion with academics who support
the consumption tax. The general and desirable characteristics for academics, both for the
consumption tax and the income, is that there is justice and efficiency. Most tax researchers
and economic thinkers who have analyzed these issues begin their dissertations by proposing
an optimal tax system based on these two characteristics. Therefore, this standardized process
to study the monotax will also been taken into account in this investigation because it follows
common practices within the area.

Although this methodology has been criticized given that there are other characteristics that
influence these taxes, there is enough evidence to support the hypothesis that at least justice
and efficiency are always present in a tax system. Despite the importance of this position,
few researchers have studied the direct application of this theory in a Colombian case. In
consequence, there does not seem to be an integral study that focuses on relating the monotax
with international. As a result of the lack of information about this topic, this paper will relate
the monotax with the international theoretical positions.

Lozano and Hofstetter (2011) demonstrated through data that there are tensions between the
principles, objectives and characteristics in a “optimal” tax system. These authors explain
that some economists see taxation with skepticism and another group of them considers it is
a vital government objective. Within the first group they find the observations of Smith
(1776), Ricardo (1817) and Stiglitz (2000), whom agree that even though taxes are inevitably
painful, they seem necessary to support the public sector economy and the redistribution of
income. The second group is composed by Keynes (1936), R.A Musgrave and P.B Musgrave
(1992). They argue that tax structures are created to pursue specific economic objectives such
as stability and growth.

In this document we evaluate two aspects. Our first approach is an evaluation of the
Colombian fiscal panorama through 2016 and 2017. Within this context, we analyze if there
were enough economic and tax incentives to motivate the small merchants with the use of
monotax. Not only we identify certain weaknesses and vulnerabilities through the application
of this tax but also we suggest the importance of designing a new monotax based on the
principles of flat tax.1 For this reason, this document hopes to show that the monotax must
contemplate a single constant marginal rate without deductions that brings together other
taxes not contemplated by law.

We have organized the rest of this article as follows: First, a description of the tax situation
in Colombia. Second, we explain the reasons that induce the Colombian government to
include a monotax in the tax reform of 2016 based on classic economic postures. Third, we
will describe the tributary elements of monotax, the position of the doctrine regarding this
government tribute and the reasons that discourage its application. Fourth, we analyze and
argue whether the flat tax approach can be beneficial for monotax based on recent studies.
Fifth, make a conclusion that summarizes the arguments presented.

Literature Review
The economic situation of Colombia was compromised given the increase in the constant
labor informality. According to the National Administrative Department of Statistics (DANE
in Colombia), the informality rate in the first quarter of 2017 had grown on 1% in 23 cities
and metropolitan areas compared to the previous year. Taking into account the above, a high
proportion of informality implies that the Colombia State could not collect 48.5% of taxes
from the informality population.

1The flat tax is a proposal made by specialists from Stanford University, that deals with the administration of the United
States income tax, which is considered complex, expensive and inefficient. This proposal considers a simple alternative
based on the taxation of consumption. (Dian,
https://www.dian.gov.co/dian/cifras/Cuadernos%20de%20Trabajo/Flat%20tax_Una%20Opción%20tributaria%20para%2
0Colombia.pdf) página 12)
In consequence, the State didn’t have enough income to sustain the entire public expenditures
of the nation. According to the Minister of Finance, Mauricio Cárdenas, the State must
finance 30.3 billion pesos to start the works of the Fourth-Generation roads and sustain the
expenses of the post-conflict. Because of this economic situation, the Commission of Tax
Experts promote a fiscal amendment aimed to increasing the national budget by creating an
optional tax known as monotax.2

According to the initiative, small and medium-sized companies (SME) could voluntarily
apply to the following two options. The first possibility was to pay individually the usual
taxes such as income, Value Added Tribute (IVA in Colombia) and social security; in
contrast, the second option was to group all these tributes and unify them in a monotax. The
incentives for the taxpayers to choose the second possibility were the admission to: (I) the
program Periodic Economic Benefits (BEPS in Colombia); (II) life or funeral insurance; (III)
the system of Family Compensation Funds, and (IV) the admission to the Occupation Risk
Management (ARL in Colombia)3. The review of various political leaders was positive with
respect of these benefits. On one hand, the Colombian economist and politician, Guillermo
Perry, states that "this measure is beneficial in every way, since it combats informality, makes
the tax process simpler and gives many benefits to small merchants".4 On the other hand,
Guillermo Botero, president of Fenalco, points out that "the proposal has an immense
advantage, being voluntary, which is why each trader can define which model is best for
him"5. Finally, Mauricio Cárdenas explains that monotax "is a simplified alternative to
comply with tax obligations that allows small businesses to enter into formality and
strengthen their businesses."6

2
The Commission is composed of nine experts and was created to fight tax evasion, as well
as making the tax system more equitable and efficient.
https://www.portafolio.co/economia/impuestos/comision-expertos-tributarios-2016-155086
3
Law 1819 of 2016
4
Referenciar
5
Referenciar
6
Referenciar
Analysis
Even though the commentary of these leaders is right, the economical perspective is that the
benefits does not manage to strengthen SME. As a matter of fact, one disadvantage of
monotax is that SME begin to assume other tax obligations that are not included in the
package of monotax, once it is formalized. In other words, there is an implicit disincentive
because a SME will be in the need to comply for more tax obligations. Due to this aspect, the
taxpayers incur costs that reduce savings and potential investment in their businesses.
According to the regulations, those who accept monotax must register in the Unique Tax
Registry (RUT in Colombia) as a taxpayer. Although the procedure is completely free, the
reality is that taxpayer acquires at least 40 tax responsibilities which harm their financial
returns. Some of the fiscal duties mentioned by the Directorate of Taxes and National
Customs (DIAN in Colombia) are: Taxation of Financial Movements (GMF in Colombia),
Withholding of National Stamp (Retención Timbre Nacional in Colombia), obligation to
keep accounts, Retention in the Source (Retención en la Fuente in Colombia), among others.
As a result of these fiscal obligations, a SME might consider investing in its business even if
it acquires a limited list of benefits instead of paying taxes to the State.

According to the doctrine, the monotax has hybrid nature of national tax with specific aspects
of destination and contribution. Scorza (XXXX) explained there is a hybrid nature due to the
amount paid has two components. In one hand, the resources are destined as national tax; in
the other hand, there is a contribution to BEPS Social Service7. Also, this author states that
the taxable event (Hecho Generador in Colombia) is the obtaining of ordinary and
extraordinary income; while the taxable base is composed of all the gross income received
in the respective taxable period; and finally, the fixed rate depends on the category of the
taxpayer. In relation with the above, the author raises three questions without concrete
answers: first, when should income be recognizable; second, how the SME should account
the taxable event if they work under the cash criterion and not by causation? And third, why
the fixed rates are only proper for businesses with high profit margin if the monotax is
considered for small merchants? Scorza's position raises doubts about the way in which the
taxpayer must carry out his accounting, and the costs he must incur to comply with the tax

7
EXPLAIN
obligations. Following the opinion of this author, the evident benefit for taxpayers is the
access to social security.

This paper shares the appreciation of Guillermo Botero (XXX), who states that one advantage
is that monotax is optional and may be this tax might sound favorable for SME that are in
tough economic positions. In spite of this opinion, the DANE report that during 2017 the
situation of informality did not improve significantly since de introduction of monotax by
law 1819.8 Moreover, the National Institute of Public Accountants of Colombia (2018)
affirmed that the initiative did not meet the expectations. There were expected 200.000 SME
to be part of the monotax, but only 35 individuals registered meaning less than 1%.9
According to the Private Competitiveness Council (CPC in Colombia) it is evident that while
in the ordinary income system no tax is paid, which implies an effective rate of taxation of
%, in the three ranges established in the monotax a tax is generated. Also, a report of this
entity indicates that only with a profit of 30% it would be competitive to enter the monotax,
but the vast majority of the businesses do not receive the sufficient amount of revenues to
obtain those margins (National Report of Competitiveness, 2018). In relation with the above,
the president of the National Federation of Merchants (FENALCO in Colombia) Guillermo
Botero stated that the dissemination and pedagogy campaigns only came to be done in the
last month before finishing the deadline to apply.10

Monotax as Flat Tax

The Flat tax model consist in a single tax rate applied on the income of companies and
individual persons; moreover, there are no special cases or exception. As reported by the
DIAN (XXXX), this proposal would disappear the personal taxation and these would be
determined in the source that generates them. This assertion is not equivalent to state that
people would not pay taxes. On the contrary, it is the business that would not have this tax,
since all the expenses required for its operation would be deductible.

8
https://www.elespectador.com/economia/en-2017-cayo-levemente-la-informalidad-en-el-pais-articulo-
738982
9
https://www.incp.org.co/monotributo-200-000-aplicaron-35/
10
https://www.incp.org.co/monotributo-200-000-aplicaron-35/
In agreement with this methodology, Fernandez (2015) suggest that the implementation of
this model increases the number of taxpayers, the tax rates are fair for all business and this
model benefits the companies that invest in technology and machinery. Due to the Flat Tax
eliminates the depreciation expenses as deductible, there is less complexity in relation to the
accountability for SME. Since the fiscal system in Colombia is based on complicated tax
legislation, this purpose also searches simplicity and allow the taxpayer save fees paid to
accountants. In economic terms, the flat tax is a convenient tool for government to increase
efficiency and productivity and promote the generation of productive employment.
Furthermore, this model improves democratic institutions as there are no exonerations and
its simplicity prevent tax policy to favor groups related to the government.

The principles of Hall-Rabushka, just like the study of Ch. E McLlure Jr and GR Zodrow
about Flat Tax, can help in the suggestion of five components that should be considered in
the creation of a new monotax. First, the flow of real business cash and the social security of
labor income of individuals should be taxed in a different mode. Second, the monotax should
expand the number of expenses that can be deducted from tax. Third, financial transactions
should be ignored. Fourth, there should be a single flat rate applied for all type of SME
business in order to alleviate the financial burden.

Conclusion
It is possible to establish that, although the monotax is a good approximation to reduce
informality and increase public revenues in the medium term, the government should opt for
a solution that also guarantees the sustainability of small businesses. The implementation of
a new tax will need to take into consideration the raising need of SME, in order to motive the
business man to pay taxes. Especially, the agenda of the government should focus in the
correction of technical errors in its tax rates, create sufficient advantages to help SME be
more competitive and began a effective campaign with enough time to promote its benefits.
If the Minister of Treasury wants to enroll more than 200.000 small merchants for the coming
years, then it is necessary to consider a structural reform.