Elites and taxation:
the case of the Colombian democratic security
tax
Hannah Gracher
Abstract
Using a political economy approach, this paper will examine the role and perception of threat
and interest group formation dynamics in the evolution of tax capacity. In particular then, this
paper will explore why the Colombian state was able to collect the 2002 democratic security
tax and its multiple extensions from the wealthiest taxpayers, despite elites having resisted
direct taxation during decades of conflict. This paper argues that the introduction of this
wealth tax was facilitated not only by a new urgency in the perception of threat to security
and the economy, but also by a moment of elite cohesion supported by Uribe’s particular
position in the elite network. However, this paper also finds that the acceptance of the
democratic security tax was linked to an assurance of forestalling a structural tax reform
which would have put the increase in tax revenue on a more sustainable footing. Moreover,
this paper argues that an increase in direct taxation under the Uribe administration did not
result in a statebuilding exercise, as Tilly's theory of European state building postulates,
since the institutionality of the Colombian state was continuously undermined.
1
The issue of taxation has gained new prominence in the realm of international development,
expressed clearly in the 2015 Addis Tax Initiative aimed at promoting tax reform in
developing countries and reducing domestic and international tax evasion (UK Government,
2015). Justine Greening, the UK Secretary of State for International Development,
maintained that domestic resource mobilisation is a central issue to ending poverty in
developing countries and would become a priority of UK development assistance in the
context of the UN Financing for Development Conference (UK Government, 2015). What is
not mentioned, however, is the feasibility of such an endeavour, in particular the difficulty of
taxing elites. This paper will examine why the Colombian state was able to increase its tax
take, focusing particularly on the 2002 democratic security tax.1
Winters recognises the feasibility issue when he states that “oligarchy is defined by the
politics of wealth defense” (2014, p. 15) which includes averting taxation (Pearce, 2015).
Winters distinguishes elites from oligarchy, as he maintains that the foundation of oligarchic
power is material wealth, while elites’ sway stems from non-material power resources,
including formal political rights, official positions, coercive power and mobilisational power
(2014, pp. 13-15). While the discussion in this paper includes issues of oligarchic wealth
defence in terms of examining when the Colombian oligarchy is willing and not willing to pay
taxes, this study will consider the changing relationships between economic and political
elites in analysing why the Colombian state was able to collect the democratic security tax
from the Colombian oligarchy and will henceforth use the term elite. This paper then argues
that the introduction of the wealth tax in 2002 was facilitated not only by a new urgency in
the perception of threat to security and the economy, but also by a moment of elite cohesion
supported by Uribe’s particular position in the elite network. However, a comprehensive
structural reform of the tax system has proven unsuccessful in the face of elite opposition
and the increase in tax capacity of the state is premised on insecure foundations.
1
The paper will use the terms democratic security tax and wealth tax interchangeably.
2
Colombia presents an interesting puzzle as for a long time it presented a typical Latin
American case. Despite an on-going armed conflict on its territory, Colombia’s elites were
unwilling to pay taxes to strengthen the state to enable it to deal with this threat. However, in
the early 2000s this changed and the overall tax take of the Colombian state almost doubled,
due to a significant increase in direct taxes. Therefore, the focus of the analysis exploring the
dynamics behind this phenomenon will remain centred on the early 2000s. Moreover, as the
peace process with the Revolutionary Armed Forces of Colombia (FARC) is ongoing in La
Habana, it is particularly relevant to examine the dynamics of tax reform in Colombia, as
President Santos will need to find the means to pay for the provisions of a possible peace
accord which would most definitely include domestic resource mobilisation.
Firstly, this paper will discuss the administrative and economic approaches to tax and their
shortcomings, presenting the case for a political economy approach to understand changes
in tax capacity. Furthermore, it will review the literature on war and its links to taxation and
statebuilding as well as the literature on elite bargains. Secondly, this paper will scrutinise
the Colombian tax revenue data and explore the changing tax structure with particular focus
on the implications of the introduction of the democratic security tax. Thirdly, this paper will
examine the role and perception of threat in the introduction and acceptance of the
democratic security tax. Moreover, it will analyse the interest group formation processes that
facilitated elite taxation, while also pointing to the tensions that underlie the temporarily
established elite bargain. Lastly, this paper will consider the impact of the dynamics of the
early 2000s on the Colombian state.
3
Contending Approaches to Taxation and Tax Reform
The Latin American tax structure is generally characterised by higher percentages of indirect
taxes compared to direct taxes, indicating its regressive character (Salazar, 2013, p. 13;
Bernardi, et al, 2007b, p. 13).2 In the literature on taxation in Latin America, constraints on
tax reform to increase the tax take are commonly identified in a general sense as
characteristics of the administrative capacity, economic structure and political feasibility
(Burgess and Stern, 1993, p. 796; Tanzi and Lee, 2000, p. 3; Lledo, et al, 2004, p. 1; Bird,
1992, p. 31; Bernardi, et al, 2007a, p. 18). These different approaches and their explanatory
value will be briefly discussed.3 However, this paper will consider the political economy
approach as a useful explanatory model of tax reform in 2002.
In the 1980s, state intervention in the economy was associated with government failure
(Burgess and Stern, 1993, p. 763). The main objective of tax reform in developing countries
at the time was the simplification of the tax system in order to align it with administrative
capability and remove the perceived distortionary effects of government intervention (Di
John, 2006, p. 2). Accordingly, tax administration constraints were considered a formidable
barrier to maximising revenue collection (Bird, 1992, p. 33; Di John, 2006, p. 5). However,
Ramos points out that the Colombian tax administration is characterised by high capacity
and surprisingly low tax collection rates (Ramos, 2010, p. 1). She consequently argues that
existing administrative problems in Colombia are not the result of bad design, but the result
of political choices (2010, p. 13).4 Moreover, the administrative approach to tax cannot
2
Direct taxes include those on income and property, while indirect taxes include taxes on domestic
and internationally traded goods and services (Lledo, et al, 2004, p. 13, 26).
The distributional impact of taxation across the population is captured by the terminology of
progressive and regressive taxation. As Boyce and O’Donnell explain, progressive taxation refers to
“taxes that fall more heavily on the rich than on the poor (as a percentage of their income)”, while
regressive taxes “fall more heavily on the poor” (2007, p. 8). This paper will follow the commonly used
practice of analysing direct income taxes as a proxy for taxing the rich, and indirect consumption
taxes as a proxy for taxing the poor (Bird and Zolt, 2013, p. 18).
3
For an in-depth critique of the different approaches to tax, see Di John (2006).
4
For example, following the guiding principle of simplifying administrative procedures, national tax
collection was taken over by banks in 1988 which resulted in the loss of access to taxpayers’
information by the tax administration (Ramos, 2010, p. 12).
4
explain why and how tax capacities change, which is what this paper examines (Di John,
2006, p. 5). Apart from the administrative approach, the economic approach is a further
static approach to tax (Di John, 2006, pp. 4-5).
The structure of the economy, i.e. low economic development and the size of the informal
sector, are also seen as formidable constraints on the tax take (Burgess and Stern, 1993;
Brautigam, 2008, p. 5). However, this view is challenged by Best in his analysis of power
and taxation in Central America (1976). Best dismisses the argument that the Central
American governments had already achieved the maximal tax effort and that the tax take is
determined purely by economic variables (1976, pp. 50-1, 59). He argues that the tax size
and composition is instead the result of political power relations (1976, p. 66): “it is
concluded that the landlord class has sufficient power over other classes in Central America
to effectively block increased direct tax implementation” (1976, p. 50). This argument is
echoed by Fairfield, who states that “revenue from direct taxes on income and profits tends
to be low not only in absolute terms [in Latin America], but also compared to countries with
similar development levels. To a significant extent, raising more revenue therefore requires
directly taxing economic elites” (2010a, p. 42). However, she also recognises that these
elites are well positioned to counteract any such intention by the state (Fairfield, 2010a). Bird
and Zolt are more moderate in their take on the economic approach, maintaining that
economic structures do have an impact on tax levels and structures but they also contend
that politics ultimately determine the tax outcome (2013, p. 21).
This paper will use a political economy analysis to explain the increased tax capacity of the
Colombian state that incorporates an understanding of processes of conflict and bargaining
by examining the role of war and threat as well as the importance of negotiation between the
state and interest groups to mobilise resources (Di John, 2006, p. 7). This paper argues that
a political economy approach is particularly appropriate as it will facilitate the exploration of
the link between war and tax capacity in Colombia – a country that has experienced decades
5
of armed conflict – which the literature on taxation and tax reform in Latin America generally
does not touch upon.
There are multiple explanations and perspectives for successful tax reforms in the literature
on taxation in Latin America. The occurrence of crisis is a recurring explanation for tax
reform as it can be used to overcome opposition and administrative inertia (Bird, 1992, p. 32;
Bernardi, et al, 2007a, p. 20; Sanchez, 2006; Campbell, 1993). This explanation is of
particular interest to this paper, as the 2002 wealth tax was adopted during a severe
economic and security crisis. However, Sanchez warns that crisis occurrence has limited
explanatory power, as it lacks predictive content concerning what the policy response may
be (2009, p. 105). Nevertheless, by exploring the role and perception of threat, a political
economy analysis is able to consider the role of crisis, while not solely relying on its
occurrence as the explanatory variable.
International factors also feature prominently in explanations of tax reforms (Mahon, 1997;
Brautigam, et al, 2008, p. 23; Lledo, et al, 2004, p. vii). In fact, the Colombian government
was in negotiation with the IMF due to its balance of payments crisis and the US government
due to its security crisis at the time of the introduction of the wealth tax (Olivera, et al, 2010,
pp. 26, 40; Salazar, 2013, p. 7). Furthermore, it is important to note that US aid that poured
into Colombia was crucial for the strengthening of the army and the weakening of the FARC
(Palacios, 2012, p. 187; Flores-Macias, 2014, p. 495). However, this paper builds on the
literature that argues that endogenous factors are central to explaining political processes in
Latin America and relying on external factors for an explanation is simplistic (Yashar, 1997,
p. 13; Nugent and Robinson, 2001, p. 32; Fairfield, 2010b, pp. 63-65).
A political economy analysis also demonstrates that an examination of the institutional
environment alone is inadequate to explain changes in tax outcomes, as the institutional
environment (e.g. tax laws and constitution) is shaped by specific interests (Di John, 2006;
Gutierrez, et al, 2007, p. 25). Moreover, contrary to an institutional approach, a political
6
economy analysis is well placed to examine whether the increase in direct taxation in
Colombia has coincided with a process of statebuilding.
War, Taxation and Statebuilding
The link between war and taxation is especially recognised in the literature on European
state formation (Brautigam, et al, 2008, p. 2). In his chapter Tilly describes an idealised
sequence through which ‘war makes states’ (1985, p, 183). Tilly maintains that successful
war making leads to increased extraction of resources for war making from the local
population, as the successful warlord becomes dominant in his territory. War making is then
complimented by state making as local rivals are eliminated and state organisations are
established, including tax collection agencies and an extended military organisation.
Throughout this process the warlord and the developing state apparatus establish
relationships with particular classes for their mutual benefit, as the classes provide resources
for war and the warlord provides protection from the classes’ enemies (Tilly, 1985, p. 183).
Upon review of this process, Centeno argues that a greater bureaucratic complexity is the
most important legacy of European wars which developed due to the need to collect direct
taxes (1997, p. 1567). Although Tilly was explicit about not proposing a universal theory
(1985, p. 185), his writing was very influential in academic circles. For example, the puzzle of
why this dynamic has not been repeated in other regions of the world has been explored by
scholars such as Leander (2004) and Centeno (1997; 2002).
Centeno argues that war does not necessarily ‘make states’, as this depends on the
establishment of political authority and links between the state and social actors prior to the
war (1997, p. 1565). In particular, a coalition between the central authority and potential
aristocratic challengers is necessary (Centeno, 1997, p. 1570). Contrary to European states,
Latin American states were never able to impose this unity needed for extraction despite the
existence of military threats (Centeno, 1997, p. 1583). In Latin America, elites were unwilling
to finance the independence wars as these wars were not seen to threaten their social and
economic position (Centeno, 1997: 1594). Additionally, the availability of external resources
7
meant that the limited number of wars in Latin America were financed through debt and the
printing press, rather than increasing state capacity to tax citizens (Centeno, 2002, p. 28).
Until 2002, this was also the case in Colombia (Ramos, 2010, p. 15). Hence, Centeno
stresses the importance of relativity in regards to taxation. It depends not only on state
strength to impose taxation but on the ability of its citizens to resist taxation (1997, p. 1570).
Similarly, Di John argues that the ability to collect direct taxes is an important indication of
the power and legitimacy of the state in the eyes of the economic elite (2006, p. 12). These
tensions also played an important role in Colombia and will be explored in this paper.
Centeno’s argument resonates in a number of scholarly works that now challenge the ‘war
makes states’ thesis and the merits of war for increasing domestic taxation. Addison et al
sustain that there is a robust negative relationship between tax revenues and measures of
conflict, including intensity (2002, p. 1). This focus on intensity resonates with Centeno’s
argument about the impact of total vs. limited war (2002). He argues that limited wars are
unlikely to have profound impacts on states (Centeno, 2002, pp. 21-22).
However, although the history of Colombia, with its decades-old conflict where wealthy
citizens have engaged in private violence and private security provision (Gutierrez, et al,
2007, p. 36), does support Centeno’s deconstruction of ‘war makes states’ as a viable model
for understanding Colombian taxation (or lack thereof), the drastic changes in taxation
practices in the last two decades calls for a re-examination of the issue. Colombia has
almost doubled its tax income over the past two decades despite continued violent conflict
(Mahon, et al, 2015, p. 4). This paper argues that the literature on elite bargains and taxation
will assist in explaining this puzzle, rather than accepting a generalised causal explanation
between war and taxation. As Hassan and Prichard emphasise, taxation lies at the heart of
the relationship between states and citizens, and tax outcomes are the result of competing
interests; they are the “product of broader, often implicit, bargains and understandings
among political and economic elites” (2013, pp. 6-7).
8
Di John argues that an elite bargain can be crucial in determining the limits of expanding tax
capacity (2010, p. 12). Drawing on North et al’s concept of ‘limited access orders’ (2011), Di
John points out that elite bargains are central to establishing peaceful political orders (2010,
p. 12). A formidable example of this is the National Front, an exclusionary power sharing
agreement between the Liberal and Conservative Party in Colombia, that was established
after the political violence of La Violencia (1948-1958) and ended in 1974 (Gutierrez, et al,
2007, pp. 17, 21). As North et al explain, the creation of rents through limiting competition
provides an incentive for elite cooperation (2011, p. 5). In terms of taxation, elite rents are
created through tax exemptions, low income taxes and systematic toleration of tax evasion,
as is the case in Colombia (Di John, 2010, pp. 12, 20). This paper argues that an elite
bargain also played a central role in the introduction and the extensions of the wealth tax.
Yashar’s basis of analysis is the unity or division of elites and coalitions among social groups
in explaining political outcomes (1997, p. 25). Contrary to Centeno, who maintains that elite
cohesion in terms of the relationship between the state and elites will allow for an increase in
taxation, Yashar predicts that divided elites (which requires public expression) facilitate
taxation (1997). In his discussion of the democratic security taxes, Flores-Macias examines
business-government relations and argues that it was not until 2003 that elite cohesion
played a key role in the renewal of the tax (2014, p. 483), concurring with Centeno that elite
cohesion facilitated taxation. However, he also maintains that the different theories,
represented by Yashar (1997) and Centeno (2002), ultimately point to similar mechanisms to
support their argument, i.e. the establishment of linkages with key decision-makers,
consultation forums and collaboration mechanisms (2014, p. 482).5 While his article is an
excellent starting point for this paper, his analysis of elite politics is brief and will be
expanded in this paper in examining the shifting nature of the elite bargains in Colombia in
the early 2000s.
Brautigam et al refer to this as the importance of embeddedness, as they maintain that “successful
embedding of the state and business builds trust, eases monitoring and supports the exchange of
information” (2008, p. 30).
5
9
Tax Structure in Colombia
As Graph 1 shows, tax revenue in Colombia has been steadily increasing since 1990 (ICTD
GRD 2014; Ramos, 2010, p. 14).6 Despite Colombia almost doubling its tax take over the
past two decades (Mahon, et al, 2015, p. 4),7 this has remained below the regional average
and has not been enough to meet the demand of increased spending commitments laid out
in the 1991 Constitution (Ramos, 2010, p. 1; Salazar, 2013, p. 8-9; Cardenas, et al, 2006, p.
41). The main objective of tax reforms that were implemented in the decade following the
new Constitution was the increase of revenue in the short run to stem the fiscal imbalance,
rather than structural reforms (Olivera, et al, 2010, pp. 3, 20; Cardenas, et al, 2006, p. 45;
Flores-Macias, 2015, p. 107).
Tax Revenue in Colombia
Tax revenue as % of GDP
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.00%
Total Revenue
Total Tax Revenue
Total Non-Tax Revenue
Graph 1: Tax Revenue in Colombia (ICTD GRD, 2014)
6
Bernardi et al caution the use of economic data due to widespread tax evasion and the substantial
size of the informal economy (2007b, pp. 2, 13). In Colombia, the tax base remains very limited as the
majority of taxes are paid by large taxpayers (Ramos, 2010, p. 6). Moreover, the administrative reach
of the state is also inhibited by armed agents, as the Colombian state does not have a monopoly on
the use of violence or taxation (Ramos, 2010, pp. 6-7; Rettberg, 2007, p. 489).
7 This increase in taxation occurred at the same time as the massive influx of US aid via Plan
Colombia (Di John, 2010, p. 21; OECD-DAC, 2015). The introduction of the wealth tax in fact
facilitated the negotiation on Plan Colombia, as the US wanted Colombians to pay for their own
security (Olivera, et al, 2010, p. 28). See Prichard et al (2014), Benedek et al (2012) and Morrissey et
al (2014) for the debate on aid and taxation.
10
As seen in Graph 2, direct taxes are persistently lower than indirect taxes which is indicative
of Colombia’s regressive tax system (Salazar, 2013, p. 13; Bernardi, et al, 2007b, p. 13).
However, while this discrepancy is significant until 1991 and between 1994 and 2002, since
2002 the gap has been closing again due to a more rapid increase in direct taxes post-2001
in comparison to indirect taxes which have been increasing more gradually (ICTD GRD,
2014; Bernardi, et al, 2007b, p. 5; Ramos, 2010, p. 5). Colombia’s tax system is thus
becoming more balanced as the rich appear more willing to pay direct taxes (Profeta and
Scabrosetti, 2007, pp. 7-8). However, this paper argues that the willingness to pay direct
taxes was conditional and it remains uncertain whether the current tax effort can be
sustained as tax revenue raising reforms continue to prevail over structural reforms.
Direct and Indirect Taxes in Colombia
14.00%
% of GDP
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0.00%
Total Tax Revenue
Direct Taxes
Indirect Taxes
Graph 2: Direct and indirect taxes in Colombia (ICTD GRD, 2014)
Graph 3 depicts taxes on goods and services, individuals, corporations and trade as
percentage of GDP. The most significant increase can be observed in taxes on goods and
services. As Ramos points out, VAT has become the most important source of tax revenue
for the Colombian state since 1994 (2010, p. 4). While the tax take on goods and services
increased, there was a significant drop in trade taxes in the late 1980s and early 1990s,
thereafter the tax take has remained constant. The decrease was the result of the trade
11
liberalisation and deregulation programmes implemented by the Colombian state (Ramos,
2010, p. 4; Bernardi, et al, 2007b, p. 4).
Miscellaneous direct and indirect taxes in
Colombia
0.07
% of GDP
0.06
0.05
0.04
0.03
0.02
0.01
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0
Individuals
Corporations
Goods and Services
Trade
Graph 3: Miscellaneous taxes in Colombia (ICTD GRD, 2014)
Meanwhile, the tax take stemming from ‘individuals’ is persistently low with little change
(ICTD GRD, 2014; Ramos, 2010, p. 4). The taxation of individuals is characterised by a
myriad of exemptions from which high income individuals particularly profit (Salazar, 2013, p.
11; Bernardi, et al, 2007b, p. 4).The virtually non-existent personal income tax burden is
indicative of an elite bargain (Di John 2010: 20). Bernardi et al support this interpretation as
they “believe that the country’s landlords and its other wealthier citizens deliberately chose to
avoid directly taxing the middle classes (and themselves) to obtain political consensus”
(2007b, pp. 5-6).
Corporate taxes have the most erratic tax pattern in comparison to the other tax categories
(ICTD GRD, 2014), and similarly to the taxing of individuals is characterised by many
exemptions, which are governed by political decisions (Ramos, 2010, pp. 9, 12; Salazar,
2013, p. 10). Data is only available since the 1990s and the first decade of available data is
characterised by a continuous drop in the tax take until 2000. Then there is a significant hike
12
from 2000 to 2001 from 0.45% to 1.5%, which then drops again to 1.07% in 2002 but is
followed by a steady and significant increase until 2007 (2.15%).
The first hike can be traced back to the introduction of the so-called democratic security tax
in 2002 that claimed 1.2% on liquid net assets for working capitals of US$60.000 or higher
(Rettberg, 2007, p. 490). This security tax, paid by Colombia’s wealthiest taxpayers, was
earmarked for defence and security expenditure, accounting for approximately 20% of the
defence and security budget. It funded an increase in size and professionalization of the
military (Flores-Macias, 2014, pp. 478-479). This wealth tax was ultimately extended on four
separate occasions with minor alterations to percentages and tax bases (Flores-Macias,
2014, p. 479; Ramos, 2010, p. 10; Bernardi, et al, 2007b, p. 6). The wealth tax, together with
the financial transactions tax from 1998, contributed to approximately 7% of total tax
collections in the early 2000s (Ramos, 2010, pp. 4, 9). A closer look at the tax data already
reveals that the increase in direct taxes does not necessarily indicate a shift in attitude of
Colombian elites to paying taxes, despite the significant increase in the tax take of the state
and the emergence of a more balanced tax structure.
The perception of threat
The antecedents of the armed conflict in Colombia lie in La Violencia. After this episode of
intense political violence, the self-defence groups, that had been established, transformed
into a low-intensity guerrilla insurgency in the 1960s and 1970s (Chernick, 2003, p. 185).
Historically, the conflict was ‘limited’ in terms of geography and casualties (Guerrero, 2006,
p. 414). There was only a change in conflict dynamics in the 1980s when the number of
combatants increased as well as casualties, the territorial coverage, financial resources and
political and social support for the armed actors (Palacios, 2012, p. 176). It was together with
the escalation of violence that the conflict evolved into a multi-polar war, including guerrilla
groups, paramilitary groups and the state army (Chernick, 2003, p. 185).
On the one hand, this escalation of the conflict was the result of its transformation when
narcotics entered the picture (Chernick, 2003, p. 192). There was a significant expansion of
13
paramilitary groups financed and supported by drug traffickers and cattle ranchers
(Hesselbein, 2011, p. 13). Meanwhile, the FARC as well as the National Liberation Army
(ELN) were able to expand their military capacity (Chernick, 2003, pp. 192-193; Nasi, 2009,
p. 63). On the other hand, Plan Colombia, the military aid package that was negotiated with
the United States under Pastrana, was also crucial in fuelling the escalation of violence as
clashes between the conflict parties increased (Idler, 2015; Nasi, 2009, pp. 55-56). Despite
the deterioration of public security generally (Leal, 2004, p. 96), the conflict played out
predominantly in rural Colombia, as “the most violent areas of the country continued to be
overwhelmingly rural” (Chernick, 2003, p. 195). The zones most affected by the violence
were the coffee-growing regions, along with the coca-growing zones that had only been
colonised during the previous decades and were characterised by the absence of the state
and traditional political parties (Chernick, 2003, p. 195).
As the FARC was able to consolidate their financial autonomy through their involvement in
the drug trade and expand the territory they controlled, the armed group entered the peace
talks under President Andrés Pastrana (1998-2002) from a position of strength. This allowed
them to demand a demilitarised zone, so-called El Caguán, as a precondition for talks (Nasi,
2009, pp. 45-46; Leal, 2004, p. 98). However, it eventually transpired that the FARC pursued
devious objects during the peace talks, using El Caguán to build their military capacity and
political legitimacy (Palacios, 2012, p. 191; Nasi, 2009, p. 55; Leal, 2004, p. 99). Ultimately,
the peace talks collapsed with Pastrana having lost his credibility in the eyes of the public, as
well as the economic elite that had originally supported the quest for peace (Rettberg, 2007,
pp. 485, 489, 490).8
By this time, the security situation in cities was also becoming precarious as the FARC
shifted from its strategy of local power consolidation to conducting attacks in Colombia’s
major cities in mid-2002 (Leal, 2004, p. 102). The extent of the security crisis legitimised a
8
Rettberg highlights the ambivalence of the private sector in regards to a political solution or a military
approach to the armed conflict. She argues that its stance greatly depends on the varying perceptions
about the cost of conflict (Rettberg, 2007, p. 482; Rettberg, 2009, p. 203).
14
military solution to the FARC problem in the eyes of the public, as a political resolution
seemed out of reach (Leal, 2004, p. 102). This facilitated an unprecedented first-round
victory in the presidential elections for Álvaro Uribe in 2002 who had campaigned for
pursuing a military defeat of the FARC (Chernick, 2003, p. 204; Bouvier, 2009, p. 10).
In addition to the precarious security situation, Colombia was experiencing an economic
recession (Rettberg, 2009, p. 202). When Uribe entered office, the Colombian state found
itself without access to international credit markets (Olivera, et al, 2010, p. 25; FloresMacias, 2014, p. 486). A continuation of the policy described by Centeno (2002) so prevalent
in Latin America, of financing war through debt, became impossible as the Colombian
government found itself in talks with the IMF for a structural readjustment programme
(Ramos, 2010, p. 15; Olivera, et al, 2010, p. 40). As Palacios points out, armed conflict and
economic growth coincided for decades in Colombia (2012, p. 183). Similarly, Rettberg
states that business interests were only affected by the conflict in the 1990s when the
business elite became the target of kidnappings, extortion, security taxes and bonds.
Moreover, international investment started to avoid Colombia due to the security risks; “the
long-standing Colombian conflict ha[d] turned into a liability affecting the country’s
competitiveness in the region and worldwide” (Rettberg, 2009, pp. 192-193). By then, the
cost of the conflict to the national economy was calculated to be substantial (Rettberg, 2013,
p. 6). Rural Colombia was particularly hard hit, not only by the armed conflict but also the
economic recession of the late 1990s (Rettberg, 2007, p. 483; Idler, 2015).9
The crisis was unprecedented, affecting the political, economic, social, military and
international relations spheres (Guerrero, 2006, p. 418). Idler concurs with Guerrero,
highlighting that the 2000s was “one of the worst moments of the country” (Idler, 2015) and
substantially threatened the interests of the economic elites. However, the army remained
weak (Guerrero, 2006, p. 413; Pearce, 2015) as a consequence of lack of investment due to
the elites’ unwillingness to pay for public security, instead preferring private security
9
The short-lived offer by the president of the National Cattle-Raisers Foundation to cede 10% of his
land to facilitate peace, is illustrative of this (Guerrero, 2006, p. 412).
15
arrangements; “the lack of a serious security investment in a country at war is the result of a
social dilemma among the economic elites” (Gutierrez, et al., 2007, p. 36).
It was in this context that Uribe declared a national state of emergency on 11 August 2002,
following an attack on the seat of government at the time of his inauguration (Leal, 2004, p.
102; ICG, 2002c, p.4). He used the state of emergency to declare a one-off democratic
security tax earmarked for security expenditure, thus circumventing the ordinary institutional
process (Flores-Macias, 2014, pp. 487-488; Cardenas, 2006, p. 31).10 Simultaneously, Uribe
established the so-called Rehabilitation and Consolidation Zones in which the authority of
military commanders would be above that of elected civilians as a first step to implementing
his democratic security strategy, thus again eroding the institutionality of the Colombian state
(Chernick, 2003, p. 203; ICG, 2002c, p. 3; Pearce, 2015).
As previously, the wealth tax was extended without much opposition. The extension of the
wealth tax and the continued willingness to pay the wealth tax can arguably be linked to the
changed perception of threat and perception of efficiency in implementation (Salazar, 2013,
p. 15). For example, security in the cities improved and the military’s success was
highlighted by high impact operations such as making inter-city travel safe, legitimising the
higher military expenditure (Flores-Macias, 2014, p. 495; Palacios, 2012, pp.193-194; Idler,
2015). What is more, those elites especially close to Uribe with land capacity were aware of
the continuing conflict dynamics in rural areas, as the FARC was pushed to the periphery by
the military. This elite then believed in the continued rationale of building and sustaining a
strong army to protect their interests in the countryside (Idler, 2015). To fully understand the
ability of the Colombian state to implement the wealth tax and its extensions, it is crucial to
examine the dynamics of interest group formation in the early 2000s.
10
While the wealth tax was contested before the Constitutional Court, it was not nullified (FloresMacias, 2014, p. 487).
16
Uribe’s fragile elite bargain
To understand the dynamics of interest group formation in the Colombian context, it is
crucial to grapple with the importance of local and regional networks of private power
(Chernick, 2003, p. 194). As Chernick points out, the Colombian conflict is really a series of
regional conflicts that also play out at national level (2003, p. 194).11 Similarly, Hesselbein
maintains that Colombia is characterised by fractured elite bargains that vary by region,
which is reflected in different patterns of resource mobilisation and violence; “elite bargains
vary between the central level and different provincial levels, with different interactions in
place between military actors, drug dealers, ranchers and politicians. In that sense, elite
members have the option either to pay taxes or to engage in private forms of violence”
(Hesselbein, 2011, p. 13). For example, in the coffee-growing and cattle-ranching zones
paramilitaries are integrated into local power relations, while in coca-growing regions the
guerrillas act as authorities (Chernick, 2003, p. 195).
Understanding Uribe’s standing in this network is central to understanding the support,
including the financial support, he was able to secure for his project of extending state
presence in the Colombian territory which was formalised in the democratic security policy.
Uribe is part of and has a strong attachment to the Antioquia elite that resists the notion that
Bogotá is the centre of the country and that national interests should be above regional elite
interests (ICG, 2002b, p. 4; Pearce, 2015). Hence, these elites with substantial land holdings
in rural Colombia which were later known to have intimate ties with paramilitary groups
(Palacios, 2012, p. 180; Gutierrez, et al, 2007, p. 29; Bouvier, 2009, p. 10), felt represented
by Uribe in the presidential seat (Pearce, 2015; Idler, 2015). As Palacios points out, the
support base for Uribe’s democratic security policy were mainly located in the Caribbean
region, Cauca and the coffee-growing regions as their interests were particularly threatened
by the violence and the economic downturn (Palacios, 2012, p. 180; Rettberg, 2009, p. 202).
11
While institutional analyses highlight the importance of the impact of the 1991 Constitution on the
decentralisation process (Olivera, et al, 2010; Cardenas, et al, 2006), Palacios rightly states that
Colombia’s regionalism should rather be seen as a result of at times violent contestation around
elections of local actors (2012, p. 184).
17
Importantly though, this connection does not fully explain the ability of Uribe to persuade the
multiple elites that exist in Colombia to pay the security tax. Political and economic elites in
Colombia are typically described as competitive and divided in the literature (Nugent and
Robinson, 2001, p. 4; Olivera, et al, 2010, p. 5; Cardenas, et al, 2006, p. 3).12 Hence, Uribe
was intimately connected only to a particular sector. Nonetheless, this paper argues that in
the early 2000s, Uribe was temporarily able to unite different audiences and interests. He
enjoyed broad support from the private sector as well as from political parties across the
ideological spectrum (Rettberg, 2007, p. 490; Palacios, 2012, p. 187). Being adept at
handling his public image (Leal, 2004, p. 103), Uribe, who was running as an independent
candidate for the presidency, was able to present himself as anti-politician and anticorruption, despite having been a member of the Liberal Party as governor of Antioquia. In
fact, his popularity ratings remained above 70% until 2007 (Gutierrez, et al, 2007, p. 27).
However, Palacios emphasises the contingency of Uribe’s success when he states that
Uribe’s strength was a “function of the moment and of his charisma” (2012, p. 201).
Concurring with Flores-Macias (2014) and Pearce (2015), this paper would then argue that
there was a moment of elite cohesion that encompassed the traditional as well as the
progressive elite at the time of Uribe’s first presidency. The installation of Juan Manuel
Santos as Minister of Defence is an indication of this elite pact, as Santos, as a member of
the progressive elite that supports an institution-building project, was in a key cabinet
position (Pearce, 2015). However, a dilemma arose from the limited capability of the military
and the increasingly bad image of the paramilitary groups which culminated in the United
Self-Defence Forces of Colombia (AUC), an umbrella organisation for the paramilitary
groups, being placed on the United States’ list of terrorist organisations (Leal, 2004, p. 100).
Despite their controversial character, the paramilitary groups were seen by many
Colombians as part of the solution to the security problem. Their continued presence meant
that they could be delegated the “dirty work”, while improving the respective images of the
12
See Rettberg on the changing relations between different economic elites as they have become
increasingly less effectively organised to influence politics (2004, pp. 35-36).
18
army and the state, which had been tarred as a ‘narcodemocracy’ internationally (Leal, 2004,
p. 100; Nasi, 2009, pp. 56-57; Chernick, 2003, p. 199; Guerrero, 2006, p. 417). In this sense,
Uribe’s connections to paramilitary groups that reached back to his time as Antioquia
governor served to overcome this particular dilemma (ICG, 2002b, p. 4). He was able to
pursue the democratic security policy in unofficial collaboration with paramilitary groups,
while investing in the military to enable it to take on this task in the future (Pearce, 2015).13
For a member of the progressive elite, such a collaboration, which resulted in a swathe of
human rights violations, would have been political suicide (Pearce, 2015). While this
coalition between various political and economic elites was not formal in any way, it is widely
recognised in the powerful circles in Colombia (Pearce, 2015). Similarly, Gutierrez and his
co-authors highlight the “organic link” between formal order and informal disorder which they
see to genuinely coexist (2007, p. 4).
Part of this elite pact was then the preparedness of elites to pay the wealth tax which was
earmarked for security expenditure (Pearce, 2015; Flores-Macias, 2014); Bird and Zolt call it
a “soft but credible fiscal contract” (2013, p. 20). Uribe personally assured members of the
elite that the democratic security tax would not be extended (Flores-Macias, 2014, p. 489),
although it appears to have rapidly become clear that this would actually be necessary to
secure sufficient revenue the following year (ICG, 2002c, p. 4). Moreover, the Colombian
government agreed to an official monitoring provision by establishing the Ethics and
Transparency Committee that members of the elite populated in order to monitor state
expenditure on security matters, highlighting the precariousness of the pact (Salazar, 2013,
p. 15; Flores-Macias, 2014, p. 489).
A further measure introduced in 2004 illustrates the political influence economic elites were
able to wield. The Juridical Stability Contracts were introduced, which were officially meant
to provide legal certainty to encourage investment; in reality, however, they represented
discretionary tax relief from the wealth tax (Flores-Macias, 2014, p. 491). It would appear
13
The main demobilisation law Ley de Justicia y Paz was not passed until 2005 (Palacios, 2012, p.
196).
19
then that members of the Colombian economic elite were able to access informal channels
to circumvent direct taxation, while international corporations such as BP in Casanare felt
that they were carrying the majority of the burden of the wealth tax, indicating that their
access to decision making centres was less established at this moment in time (Pearce,
2015).14 This is also reflected in the tax data that shows remarkable continuity in the tax take
from individuals, while the corporations tax data is remarkably erratic, reflecting the ad hoc
nature of tax reforms to raise revenue which were constantly subject to the politics
surrounding tax reform.
The institutional legacy of Uribe
While Uribe was able to establish a temporary moment of elite cohesion, this support was
not to last and in particular the more progressive economic elites withdrew their support from
Uribe during his second term (Pearce, 2015; Flores-Macias, 2014, p. 495). For instance,
Rettberg maintains that making the wealth tax a permanent tax was rejected and an
increase in tax evasion followed (2007, p. 490), highlighting the ability of citizens to resist
taxation. Moreover, this disenchantment was fuelled by the emerging evidence that the
funds collected through the democratic security tax were used for other state expenditure
(Rettberg, 2007, p. 490), as well as Uribe’s attempts to secure a third presidential term
(Pearce, 2015). Concurring with Pearce, this paper argues that there is currently no
evidence of a long-term commitment of elites to pay taxes (Pearce, 2015). Even when elites
were willing to pay for the strengthening of the military in the early 2000s, they continued to
resist direct taxes for other state expenditures in the realm of public services (Idler, 2015).15
Similarly, Bernardi et al argue that the increase in direct taxes reflected in the revenue
statistics cannot be judged to be sustainable but should be seen as temporary (2007b, p. 6).
Colombia has mainly seen piecemeal reforms aimed at increasing revenue in the short-term,
14
See Rettberg (2004) and Olivera et al (2010: 11) on changing lobbying practices and the rise of
economic conglomerates in Colombia with privileged access to policymaking centres. However, it is
also important to acknowledge that the first Rehabilitation and Consolidation Zone in 2002 was
established in Arauca, an oil producing region, which clearly reflects that the mineral sector was a
political priority (Chernick, 2003, p. 204; ICG, 2003, p. i).
15
And even support for a permanently strong army is not universal among elites (Flores-Macias,
2014, p. 495; Pearce, 2015).
20
rather than structural reforms with long-term impacts on the progressivity of the tax structure
(Olivera, et al, 2010, p. 19).
As Palacios emphasises, Uribe’s presidency did not generally lead to a strengthening of the
Colombian state, as institutions and democratic practices suffered (2012, p. 201). Examples
of this include the parapolitica and the false positives scandals (Idler, 2015; Pearce, 2015).
Furthermore, an indication of Uribe’s lack of interest in institution-building through increased
direct taxation is the 2006 tax reform. The first proposal of the 2006 tax reform included
structural elements which would have made the tax system more equitable and revenue
more reliable. However, Uribe refused to give public support to the proposal and assured
business elites the continuation and expansion of tax exemptions in association meetings
(Olivera, et al, 2010, p. 24; Bernardi, et al, 2007b, p. 16). While he did oversee a substantial
increase in tax revenue during his presidency that was directly linked to the threat posed by
the occurrence of armed conflict, it did not result in the advancement of a statebuilding
process.
Conclusion
In the early 2000s, elite interests were more widely threatened by the shifting geography of
war and the escalation of violence in the aftermath of the collapsed peace talks. Moreover,
the armed conflict had started to impact the national economy and consequently the
interests of the diverse economic elites. Uribe’s administration represented an elite pact
between different political and economic elites with the aim to defeat the FARC militarily,
explaining his ability to raise the funds to strengthen the army. A further component in this
success was Uribe’s relationship to elites with significant landholdings in areas affected by
violence of non-state armed actors as well as his links to paramilitary groups. However, this
paper also showed that the broad support was not absolute. While the economic elites
accepted the extensions of the wealth tax that was originally earmarked for security
expenditure, a structural tax reform that threatened elite interests more fundamentally was
deflected. Hence, the individual tax data reveals remarkable continuity, indicating the
21
persistence of an elite bargain that has ensured that the tax burden for individuals has
remained extremely low. In turn, corporate tax data reflects the ad hoc nature of revenue
increasing tax reforms since the early 2000s. Ultimately then, the examination of the role and
perception of threat and interest groups formation dynamics was instrumental to understand
why the Colombian state was able to extract direct taxes from the elite in the early 2000s,
although they had previously successfully resisted direct taxation in accordance with the
typical pattern in Latin America. An important practical implication of the findings of this
study, is that even now with a renewed international commitment to promoting more
transparent, efficient, effective and fairer tax systems, domestic politics, especially elite
politics, need to be considered to determine the feasibility of expanding tax capacity.
An important limitation of this paper is the lack of consideration of other tax reforms
implemented at the time. Instead, this paper explored the introduction of the democratic
security tax in detail to ensure a richness in analytical narrative. Moreover, the wealth tax
represented a clear instance of elite taxation which allowed for the exploration of theoretical
considerations around elites, taxation and war.
Contrary to Uribe, Santos did attempt to push for a structural tax reform in 2012. Although
the enacted reform was less ambitious and more pragmatic than the original proposal, a
crucial strategy to ensure its success in Congress was the portrayal of labour-intensive
sectors as winners and capital-intensive sectors, such as mining and banking, as losers
(Flores-Macias, 2014, p. 116). This episode suggests that the enactment of structural
reforms may have been facilitated by a publically fragmented elite. Meanwhile, revenue
raising reform was facilitated by a moment of elite cohesion as this paper showed. However,
further research into the impact of the Santos administration on the development of the
state’s tax capacity is needed to clarify the theoretical implications of this. A crucial question
in this context will be whether elites will be willing to pay for the peace with the FARC. This
paper argued that the increase in tax capacity by the Colombian state did not represent an
advancement in the state formation process during Uribe’s administration. However, it will
22
remain to be seen whether Santos is successful in pushing an institution-building agenda
during his presidency.
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