Role of financial literacy and awareness of tax impacts in an emerging economy facing tax reform

Abstract

This study seeks to assess the levels of financial literacy based on demographic characteristics of residents in Bogotá, capital of Colombia. Given the massive public demonstrations against tax reforms that have been taking place in large cities in Colombia in 2021, this paper analyses the knowledge of people of the nature and impact of tax reforms, especifically their financial understanding of the impact of these fiscal policies. Utilizing regression analysis with a quantitative and qualitative research design, the article investigates the degree of financial literacy and the relation between the financial knowledge and the current orientation in tax policy changes and their impact on the population. The data used in this study was gathered from 6,713 households in Bogotá and supplemented by in-depth interviews of representatives of each demographic group selected by careful sampling to represent each demographic characteristic. The results are structured in two parts, firstly, based on the analysis of three variables measuring levels of financial literacy of individuals relating to the interest rate, inflation and the principle of risk diversification. Secondly, qualitative research added two questions on knowledge of tax reform. Logistic regression was used. Results of both qualitative and quantitative research show that there is significant difference in the financial knowledge of people of different age, marital status and education. Interviews showed the best awareness and orientation in the mid-age group, predominantly men, who are seen as leaders. The most vulnerable group is low-educated single women. Limitation of the study is the narrow focus on households in one city. This article provides an insight into the importance of financial literacy, its monitoring, implementation of continuous improvement based on feedback loop in an economy in transition.