Chilean President Michelle Bachelet plans to present to
Congress a tax overhaul plan on Monday, a move that could very
likely define her four year term.
Bachelet, who was
inaugurated to a new term on March 11, ran on a platform that
promised tax reform as a way of making Chile a more equitable
and in the long run competitive country.
The plan has been kept
tightly under wraps, but the government knows it has to move
aggressively on the key points. Any doubts were dispelled on
March 22, when tens of thousands of people marched in the
country to demand that she follow through on
The tax reform is tied
to an education reform. The goal is to provide universal, free
education to students. This can only be accomplished with new
revenue and the administration believes tax reform will provide
what it needs.
The tax plan presented
during the campaign estimates that reforms will increase the
tax haul by a full 3% of GDP or around $8.2bn.
Taxes account for
around 20% of GDP, which is around the regional average, but
below countries with comparable GDP and well below the 34%
average of the countries in the Organization for Economic
Cooperation and Development (OECD) to which Chile
The most controversial
component is phasing out over the coming four years the FUT, a
system that allows businesses and individuals to create a
company to deposit earnings. It was designed as a way to
stimulate reinvestment, but has been roundly criticized as a
mechanism for tax evasion. FUT accounts held around $270bn at
the end of 2012, according to the tax agency.
In addition, the tax
reform will eventually increase corporate taxes from 20% to
25%. It will lower taxes on the wealthiest Chileans from 40% to
Opponents say the tax
reform will have the opposite impact, keeping companies from
investing and thereby putting downward pressure on economic
growth and job creation. They also criticize the decision to
increase taxes when economic growth is softening and
GDP expanded by only
1.4% in January, the slowest monthly increase in four years,
and unemployment was 6.1%, up from 5.7%. There are forecasts
that GDP growth, which has averaged around 4.5% in the past
three years, could dip to 3% this year.
Bachelets finance minister, has made few public
appearances, but the local media reported that he told a
conclave of business leaders in late March that the tax reform
would be accompanied by a reduction in the structural
deficit in our fiscal accounts.
He said the reform
would help Chiles human capital, which is the only way
the country will continue growing in the long run.
Joydeep Mukherji, Latin
America managing director at Standard & Poors, said
markets were not worried about Chile, because the country has a
track record of paying for what it plans to spend.
point is that both the left and the right in Chile whenever
they have tried to have a permanent increase in spending they
have tried to have a permanent increase in revenue to match
it, he said. If there is permanent spending matched
by permanent revenue, things will be okay.