Chile Politics July 2022

What happened: On 1 July, the government proposed to raise the tax take by 4.1% of GDP annually by 2026. Income taxes will rise for the richest Chileans, and there will be new taxes on personal wealth and dividend payments. The fiscal burden on the mining sector will increase, as will taxes on capital gains, and the administration will reduce tax exemptions and evasion. In contrast, the corporate tax rate will be trimmed from 27.0% to 25.0%, and the tax credit for R&D will be tripled. If approved, the new measures would still leave Chile’s tax take below the OECD average as a share of GDP.

The economic impact: The increase in taxes on the mining sector by roughly 0.5% of GDP will likely reduce the attractiveness of Chile to international mining firms. Moreover, higher taxes on dividends and capital gains could weigh on the stock market. Tax hikes on the wealthiest Chileans may drive some abroad or lead them to alter their fiscal affairs in order to pay less tax. That said, total investment in the economy should be supported by the lower corporate tax rate and extra incentives to invest in R&D.

The overall economic impact of the measures will depend crucially on how the extra revenue is deployed. If used wisely to upgrade the country’s human and physical infrastructure, this would likely boost the country’s potential growth rate. Greater equality and improved public services—key demands of the protest movement that has swept the country since late 2019—should reduce social unrest, while fiscal redistribution from the rich to the poor would likely also boost private spending, given that low earners tend to consume a higher share of their income.

The next steps: The tax proposals must now be debated by Congress. While left-of-center parties have a majority in the Lower House, President Boric’s governing coalition is in the minority there, and the Senate is equally split between left and right. This will likely entail the modification or watering-down of aspects of the tax reform to ensure its approval. Given public pressure to reduce inequality and boost spending on key services, the package is likely to pass eventually in some form. Failure to pass the package would increase the risk of a higher fiscal deficit and public debt, given elevated public spending demands—which will only rise further if the new constitution is approved in September.

Analysts at Itaú Unibanco addressed the impact of the wealth tax:

“The measure targets roughly 10,000 individuals. The experience of other economies that have implemented similar kinds of wealth taxes suggest the measures are difficult to enforce, costly to administer, and underperform on revenue; in fact, 10 of the 13 countries that have implemented these measures have eventually abolished them.”

Analysts at Goldman Sachs commented on congressional approval:

“We expect the reform to be discussed in Congress in the second half of the year, with approval possibly before the end of the year. The mining royalty currently being discussed in the Senate has faced some resistance from the opposition, and we also expect parts of the unveiled reform, such as higher dividend and capital income taxes to also meet resistance in Congress.”

Fitch Ratings spoke regarding higher mining taxes:

“The tax reform package proposed by Chilean President Gabriel Boric on July 1 includes higher taxes for copper producers that would increase costs and weaken the sector’s competitive cost position, relative to global peers […]. Increased costs will decrease mining cash flows and discourage new mining investments in Chile, favoring the migration of investors to other copper mining districts.”

You may also like...