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Chile’s Tax Reform: Laborious Days for Ms. Bachelet

In May 2011, student-led protests sparked across Chile and captured the attention of the world. They demanded a major educational reform and insisted for it to be financed through progressive taxation. President Bachelet took this unique opportunity to push Chile’s biggest tax reform in the last thirty years.

In 1973, Augusto Pinochet installed in Chile a free-market oriented dictatorship. The military government implemented an economic model with three main goals: economic liberalization, widespread privatizations and price stability. As a result, the national economy rejoiced. However, while growth was high and poverty decreased, wage inequalities widened dramatically. Additionally, by 1989 the budgets for education, health and housing had dropped considerably.

As democracy was reinstalled in 1990, the economic and political elite lobbied heavily for Chile to stay loyal to the neoliberal economic model, raising major political and legal obstacles to any significant tax increases or redistributive reforms.

On her 2013 presidential campaign, left-wing candidate and ex-president Michelle Bachelet proposed a major tax reform to fund the renovation of the education system. She took advantage of the momentum created by the student protests of 2011-2012 to mobilize public support. In March of 2014 Bachelet became President of Chile and promptly addressed the fiscal problem raising taxation of income and profits.

As of 2013, Chile’s top marginal income tax rate was 40%, while the corporate tax was only 20%. This gap was meant to motivate investment, contributing to economic growth. However, it enabled high tax avoidance: business owners became experts in consuming business profits without declaring them as individual income. Consequently, the top 1% earners, who represent 22% of national income, only pay an effective average income tax of 16%.

With this in mind, Bachelet pushed the tax reform from day one. The reform seeks 8.2 billion dollars in additional revenue, decreasing tax evasion and improving investment and saving opportunities. It includes raising the corporate tax from 20% to over 25% by 2017 and eliminating the Taxable Profit Fund[1].

In July, the Senate approved the reform after the government reached a compromise with the opposition. This change is likely to impact investment and growth. The question is whether it will pay off in the long-term. Critics fear that the pace of the changes is irresponsible, especially considering the recent slow down of the Chilean economy. Yet, the government insists that swift reforms are necessary to reduce inequalities and elitism. Nevertheless, Bachelet reassures the liberals of her commitment to public-private partnerships and the free market.

Bachelet’s commitment to the education reform will be key in justifying this policy, but increasing the efficiency and efficacy of the education system itself will be crucial.

As we wait to see how Chile’s tax reform plays out, Ms Bachelet will have to be careful: if her plan is unsuccessful, the power is likely to flow back to the centre-right in the 2017 elections.

Margarida Anselmo, 715

[1] A mechanism that enables some business owners to register their personal income from business profits as an asset of their corporation.

References:

http://www.wilsoncenter.org/sites/default/files/Tax%20Reform%20in%20Chile.pdf

http://www.economist.com/news/americas/21607829-agreement-tax-reform-marks-turning-point-chile-moderates-fight-back?zid=295&ah=0bca374e65f2354d553956ea65f756e0

http://www.economist.com/news/americas/21602681-michelle-bachelet-putting-her-countrys-growth-model-risk-ladys-turning?zid=305&ah=417bd5664dc76da5d98af4f7a640fd8a

http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-rates-table.aspx

http://www.bbc.com/news/world-latin-america-19356356

http://www.bbc.com/news/world-latin-america-19357495

http://santiagotimes.cl/historic-chile-tax-reform-given-green-light

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Author: studentnovasbe

Master student in Nova Sbe

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