URIBE IS COPING WITH INSURGENTS, BUT NOT CONGRESS

Bogota, Colombia -- Plan Colombia, the U.S. effort to quash cocaine
production here in the Andes, will cost American taxpayers about $3 billion
over its three- year life ending in 2004.

But that's only about 20% of what it will cost Colombia over the same
period to fight its narco-funded rebels, flush with cash thanks to the
toxic mix of high global demand and a limited curtailment of supply by "the
war on drugs."

Yet the cost of the war is only part of what's weighing down Colombia these
days. As problematic -- in spending terms -- is the burden of unsustainable
entitlement programs enshrined as "rights" in the 1991 constitution. With
military spending, Colombians at least get improved security, but the
return on "social" spending is nil.

Indeed the civil service bureaucracy and its militant unions are a drain on
the productive economy. The reason Colombia's left so hates President
Alvaro Uribe has as much to do with his refusal to view the government
payroll as a patronage machine as with the sympathy of many leftists for
the murderous insurgents.

They also resent Mr. Uribe's wide popularity. Thanks in part to their
efforts, he is now facing a budgetary crisis. With sub-par growth and high
expenses, the country's fiscal deficit is widening. Fearing what could be a
4% of GDP deficit this year and blocked by the left from cutting spending
to narrow it, Mr. Uribe has proposed sharp tax increases.

This should alarm U.S. leadership. Colombia is its best ally in the region
and may be its best hope for a successful democracy. But unless global
demand for cocaine drops, robbing the enemy of its purse, and the economic
advice funneled to Mr. Uribe switches to a more pro-growth stance,
Washington is going to have another Latin American crisis on its hands.

Plan Colombia is, in effect, the U.S. contribution to a much larger bill
for Columbia's war on drugs. It should also be noted that many of the costs
that the U.S. covers go to American corporations that build helicopters,
spray coca crops, act as consultants and otherwise become "suppliers" to
the effort.

After President Uribe came to power 15 months ago, the military effort
began to yield results, not in altering total narcotics supply in the U.S.,
but in weakening the narcotrafficking rebels. U.S. demand for cocaine may
also be slipping, which if true, may have hit rebel revenue. In any case,
captures of the guerrillas and other drug traffickers are up and
kidnappings of innocent civilians by the rebels are down.

Yet as Mr. Uribe has often noted, a peaceful, prosperous democracy requires
more than a military solution. It needs growth well above the anemic 2% to
3% a year that Colombia has now come to expect.

That's why the defeat of the government's Oct. 25 referendum, designed to
give the administration power to cut a runaway national budget, is so
troubling. Mr. Uribe's tax increase proposals are part of an effort to meet
deficit targets imposed by the International Monetary Fund. This dangerous
strategy will be as devastating for Colombia as it was for Argentina.

The referendum failed not because the population voted against it but
because in order to legitimize the elections seven million voters had to
turn up. In fact, Mr. Uribe's proposals, 15 in all, were reportedly
approved by and large but voter turnout only reached about six million.

Analysts point to several factors to explain why the highly popular
president didn't win this important vote. First, Colombian voter turnout,
even when a personality is featured on the ballot, is generally lackluster.
Second, the referendum questions were complicated. Third, and perhaps most
importantly, public-sector unions may have used scare tactics to influence
voters. Since arriving here earlier this week I have heard anecdotes that
suggest that activist teachers told some parents that voting for the
referendum would cost their children entry into the classroom.

These details are important because the referendum defeat was hardly the
popular rejection of the president that his enemies portray. What is true
however is that if he raises taxes, he will hand his adversaries a victory.

It probably is no coincidence that details of the Uribe tax increase
proposals began to emerge around the time an IMF emissary hit town this
week. On Tuesday, the government announced that it would raise the
valued-added tax on all products -- save a basket of necessities -- to 17%.
This is an effective increase of up to 10 percentage points on some
products. The government will also slap new taxes on pensions and there may
be new asset taxes. To his credit Mr. Uribe continues looking for allowable
cuts. His Plan B includes an effort to rein in federal transfers to
municipalities, something that got out of control in Argentina and heavily
contributed to its collapse.

Yet, despite this one redeeming feature, Plan B is a Frankenstein monster
that if brought to life will strangle the economy. The trouble with the
plan, and indeed the whole conventional approach to fiscal balance that the
president is now pursuing, is that taxes damp legal economic activity and
push many economic actors underground. Contrary to Beltway wisdom and IMF
theology, but consistent with common sense, if a government wants more
revenue, it should encourage economic activity by lowering taxes. Under
Plan B, it is doubtful that revenues will go up but it is almost certain
that the economy will take a hit.

A far better approach would be a bold tax overhaul. In an Oct. 23 report,
before the referendum failed, the Economist Intelligence Unit explained the
problem with current tax policy: "Colombia applies some of the highest tax
rates in the Americas for both corporations and individuals. This is
reflected in its D-grade for tax policy risk. A high level of distortion
arises from differential rates and exemption, complicating business
planning. Failure to curb public spending encouraged the previous
government to increase the tax burden while the influence of vested
interests has been evident in the creation of new discriminatory taxes."

There is no doubt that such a major tax reform would put Mr. Uribe and
Colombia's struggling classical liberals in the fight of their lives
against a populist, free-spending congress. But the president is a bold,
popular leader and now is no time to retreat.