5. **Colombian citizens express concern about high inequality and believe that it is the role of the state to address it.** According to the 2010 Latinobarametro survey, 32.2 percent of Colombians find that the distribution of income is „very unfair‟, while 52.5 percent find it „unfair‟. In the 2010 LAPOP survey, 45.5 percent of respondents agreed „very much‟ with the statement that „the Colombian state should implement firm policies to reduce inequality‟, while 25.9 percent „agreed‟. The latter survey also reveals that there is willingness to pay more taxes to give more to those who have less (42 percent)<sup>5</sup> . All else equal, Colombians who are relatively better off economically, those aged 50 and below, those with better education, and those whose ideologies align with state intervention express higher support for paying more in taxes to help the poor (Plata, 2011).

6. **The Santos Administration is aware of the country’s high level of income inequality and has set targets and introduced policy measures to address it.** Colombia‟s National Development Plan 2010-14 targets a reduction of 1 percentage point in the Gini coefficient per year (from 0.58 to 0.54)<sup>6</sup> . The Plan does not explicitly explain how to reach this goal aside from highlighting the importance of necessary conditions such as economic growth and improving the equality of opportunities. Nonetheless, the Santos Administration has taken several steps which may well have a positive impact on inequality in the medium term. The recently approved Victim‟s Law is likely to improve land distribution. A tax reform, approved in 2010, enhanced the rate and base of the wealth tax paid by corporations and individuals. The Government is committed to providing universal and equal access to health while maintaining fiscal sustainability. Finally, a recent reform of the system for royalties from natural resource production has improved the distribution of these resources across subnational entities. The government has also announced that it will present a structural tax reform to Congress in July 2012 and that one of its objectives will be equity.

7. **This paper highlights the role of Colombia’s tax-transfer system as a policy tool for reducing income inequality.** While the policy measures already approved by Congress go in the right direction, further measures must be adopted if Colombia is to meet the National Development Plan target. Fiscal redistribution, i.e. the way in which citizens are taxed and how they benefit from public spending, offers the most direct way through which a country can affect the distribution of personal income through public policy. Alternative ways to reduce inequality of labor market incomes, such as through education or labor market policies can also be effective, but are not analyzed in further detail in this paper (see OECD, 2012, for a discussion).

8. **The paper illustrates the unexploited potential of fiscal redistribution in Colombia by simulating the effects of a policy package.** Our calculations suggest that the proposed measures would be sufficient for Colombia to levels of inequality similar to those of Chile and Costa Rica. The proposal includes a reduction of tax incentives and benefits (tax expenditures) in the personal income and the value added taxes, initially yielding substantial additional tax

> 5 In the LAPOP survey, respondents are asked how much they agree with a particular statement on a scale from 1 (very much in disagreement) to 7 (very much in agreement).  The percentage quoted is the sum of answers in the values 5-7.  See www.vanderbilt.edu/lapop for details.

> 6 Colombia revised the methodology for computing poverty and inequality in 2011.  The National Development Plan target refers to the old methodology.  The targets using the new methodology have not yet been publically announced.

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