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 reforms.
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 belongs.
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 35%.
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 joblessness increasing.
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.
Alberto Arenas, 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.
The fundamental 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.