In my more than 30 years of professional experience in the financial industry, I have witnessed crises of different origins and natures. However, I must admit that I have rarely faced a situation as uncertain and difficult to interpret as the one our country has been experiencing since the end of 2019.  As a result of the events that took place in October of that year and the subsequent health and economic crisis caused by COVID-19, the Central Bank developed a daily economic uncertainty measure called the "Twitter-Based Economic Policy Uncertainty Index for Chile." Based on information published on 15 official Twitter accounts of the country's main television, print, and radio news outlets, with a potential reach of 25.7 million users, its purpose is to provide decision-makers with an additional indicator to their usual monitoring tools. This is undoubtedly a necessary tool, given the uncertainty associated with the pandemic and the process of institutional change initiated by the country. 

In an effort to better understand this scenario and the measures proposed by politicians to address it, I have carefully read the government programs of the pre-candidates from the two political blocs that will be competing in the primary elections in the coming days. At times, it seems difficult to understand how, faced with the same problem, it is possible to find radically different solutions, depending on the ideological commitment of the party or movement supporting that candidate. However, I have been particularly struck by the tax proposals contained in some of these programs.

With an apparent lack of knowledge about our tax system, there is talk of comparatively low and insufficient tax collection, unfairly distributed tax burdens, and other concepts that reflect an ideological bias in the diagnosis and proposals.

Any proposal to modify the current tax system must respect certain essential principles, such as tax legality, equality or fairness of taxes, their non-confiscatory nature, simplicity that favors collection, and sufficiency that allows for the provision of the necessary resources to finance public spending.

Candidates express their intention to increase tax revenue by between 5% and 10% of GDP, or rather by an additional 25% to 50% of what we currently collect. This inevitably raises the question: which taxes are they planning to increase? By how much? Or what new economic activities do they intend to tax?

The cold figures indicate that our country's tax revenue is equivalent to 20.7% of GDP, while the average for OECD countries is 33.8% (GDP), including in this percentage the revenue from VAT, personal income tax, contributions, and social security. Seen in this light, it may seem to any impartial reader that there is still room to reduce the tax gap that apparently exists with the countries we compare ourselves to.

However, this assessment is not entirely accurate, among other reasons because in OECD countries social security is pay-as-you-go (9.2% of GDP), with individuals contributing more to the system than in our individual capitalization model (1.5% of GDP in Chile).

For this reason, and before making this type of comparison, I believe it is necessary to clarify some details about the information used for these calculations. For example, if we exclude individual capitalization in the case of Chile and pay-as-you-go systems in the case of the OECD, given that these cannot be compared, the figures indicate that our country has a collection rate of 19.6% (PGB) and the OECD 25.1% (PGB) on average, which is certainly very different from the percentages and figures contained in these programs.

It is therefore interesting to review in detail the taxes we pay in Chile and see if there is indeed room for improvement in tax collection.

From a simple reading of the official data, we can conclude that in terms of VAT , Chile is around the average, but well above average in the case of corporate taxes.

 There is a significant gap in terms of revenue collection in personal income tax. Chile collects the equivalent of 1.4% of GDP from this source, while the average for OECD countries is 8.3% of GDP. How can this gap be explained?

Two facts stand out and help explain the low collection of this tax: one is the extension of the exempt bracket, which covers 75% of potential taxpayers; the other is the origin of the collection, 60% of which comes from people in the highest brackets of the tax table.

Considering the current political scenario and the prevailing climate, it seems unrealistic to think about reducing the tax-free threshold and taxing lower-income individuals who are dissatisfied with the services provided by the State in areas such as housing, health, and education, among others.

In an election year, it is not surprising that the issue of our tax system is once again taking center stage. Considering the proposals in this area and a long list of "social rights" that there is consensus on guaranteeing, it seems clear that the country will face greater budgetary pressures as a result of the need to finance these demands. The candidates' programs draw on a series of proposals that are not particularly innovative and whose implementation may have unexpected effects. Along these lines, there is talk of an increase in mining royalties, capital gains tax, taxes on unhealthy foods, elimination of exemptions, and others, whose fairness, efficiency, simplicity, and adequacy will have to be evaluated.  

However, in this discussion, it seems prudent not to forget that we are part of a global, competitive world, where countries compete to attract new capital and investors are free to make the decisions that are most convenient for them. In this tense environment that the country is experiencing, dominated at times by slogans and catchphrases, it seems prudent to calmly reflect on this and other issues of particular importance for the country we want to build.

Francisco Muñoz 

Partner – Commercial Director, FYNSA