Is there a Chilean tax policy?


This question about Chile’s tax policy is not insignificant. For a country that has boasted of being a cool head in a hot LATAM region, Chile has made a habit of kicking off the first year of any administration with substantial tax reforms.

2022 will begin the same way, albeit at the twilight of President Sebastián Piñera’s term, with a new law expanding the imposition of value added tax to all services (beware lawyers and accountants ), removing VAT benefits for construction companies, taxing life insurance public policies and imposing a 10% capital gains tax on the sale of public shares, quotas and bonds .

There isn’t really any conscious tax policy here, but rather the need to fund a universal $230 pension through adjustments here and there.

In March 2022, President Gabriel Boric will take office, and the first order of business will be taxation. While the big picture of Boric’s tax plan was made public during his presidential campaign, the details remain unknown.

It should be noted that Boric, a law school graduate who became a prominent leader of the 2011 student protests, which in turn led to him securing a congressional seat in 2014, comfortably won the 2021 election. with the support of the Communist Party. , and with an anti-establishment political discourse in which the work done by democratic governments after Pinochet was downplayed, and which included promises of structural changes ranging from the dismantling of private health insurance (presumably to divert these funds to the public health insurance system) and the private pension system (likewise, to divert private savings into a collective pension system), to overhaul the tax system in a way that allows it to deliver on its promises, just to start.

In this vein, we know at this stage that Boric’s tax plan consists of doubling down on former President Michelle Bachelet’s strategy of further increasing the taxation of capital income relative to labor income.

However, Boric’s strategy is not to target investors as such, but in particular local individuals, as taxing them would lead to an indirect distribution of wealth in Chile; an expression of social justice, some would say. This objective should be achieved by four means:

  • tax capital income in the form of dividends at an effective rate to be set between 40% and 45%, similar to what a foreign investor from a non-signatory country would face at 44.45%;
  • a wealth tax at rates of 1.5% and 2.5%, on net wealth up $5 million and $22 million, respectively;
  • a higher property tax based on a fair market value;
  • tax capital gains from the sale of public shares at a rate of 10%.

In particular, Boric’s tax plan has chosen to protect the tax position of foreign investors from treaty countries, leaving their effective tax burden capped at 35%.

A long-term policy?

What Boric’s policies have in common with Piñera’s, however, is that none of their tax proposals follow a specific long-term Chilean tax policy; Piñera is simply trying to fund specific measures adopted during his tenure, and Boric sees taxation as a way to achieve partial social justice or reimbursement.

What is also probably missing from Boric’s proposals is the consistency between trying to achieve social justice by taxing the local wealthy, which is always popular, while at the same time increasing the taxation of the middle class in a country. where it takes 25 times the average wage to pay the top marginal rate of income tax and where only 25% of individual taxpayers actually pay some form of personal income tax.

Remarkably, Piñera and Boric also share the challenge of not having a majority in Congress to do what they want – an opportunity for compromise, some might think.

In Piñera’s case, said compromise could have taken away the soul of a bill introduced by his administration in 2018 that was intended to create a more business-friendly tax system while better protecting taxpayers’ rights from the government.

While Boric’s supporters might think the same could happen to his tax plan, the truth is that our president-elect has an alternative: to sit back and wait for the outcome of the constitutional rewrite process being discussed within the Chilean Constitutional Convention elected in May 2021, which must be ratified by popular vote which is expected to take place in mid-2022.

If Boric does indeed face fierce opposition in Congress due to its composition resulting from the November 2021 election, and is unable to obtain an anticipated majority between its left-wing and right-wing coalition that will allow it to fulfilling some of his campaign promises (e.g. green taxation) and facing debt equal to 35% of GDP, a sit-and-wait strategy might be his choice.

In the end, there is a majority of Convention members who support the abolition of the Senate, a body known until now as an arena for negotiating moderate common ground, and therefore considered – by those seeking more pronounced changes – like a hindrance. If the Senate is irrelevant, Boric would have his way cleared, but he would be remembered as a president who razed his opponents instead of building alongside them.

With that in mind, long-term fiscal policy shouldn’t be an “all or nothing” matter that forces Boric to wait for his political opponents to be weeded out of the legislative branch of government, but rather (hopefully) a cool – led the debate on what the political establishment can agree the country needs in the long term.

Boric has previously signaled that he does not want to jeopardize the position of foreign investors from treaty countries, which could be seen as support for foreign investment to be cemented as a long-term policy, and an area where it could connect with the right wing.

Green taxation is another possible compromise point, not just locally for the right, but globally, given the fact that people can no longer look away and ignore the issue of global warming.

But a focal point of long-term fiscal policy is individual taxation, and this is where alignment is most difficult because of the inevitable political costs it entails.

The right does not oppose individual taxation, but fundamentally opposes net worth-based taxation, seeing it as the tax tool most likely to drive away local investors. Boric wants more personal income. This is where the compromise is necessary.

Behind closed doors, right and left would probably agree that a sustainable welfare system requires all individuals to contribute more through growth and taxation, but neither would dare to propose higher taxation of middle class without the other on board. Now may be the time to achieve this unpopular long-term fiscal policy goal.

With a constitution in tatters, political leaders can understand that what is at stake in making compromises is not just a government program or party directives, but a clear sign that long-term policies can be achieved without it is necessary to engage in an all-out policy. constitutional battle intended to reshape the country.

Through their votes, Chileans expressed the need for a more united government. The fiscal policy associated with such an election need not be left to a future constitution which unfortunately (although not unexpectedly) looks like a counter-revolutionary manifesto decorated with social rights, rather than the framework common ground through which people with different opinions could lead Chileans to free and stable prosperity.

If there’s a time to compromise, it’s now: and if there’s a long-term policy to compromise on, it’s taxation.

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

Ignacio Gepp is a partner at Puente Sur in Chile.

The author can be contacted at: [email protected]


Comments are closed.