Chilean government seeks to revive its tax reform in an adverse scenario

The government of gabriel boric will present for the second time this month a bill to raise taxes in Chiliin line with the proposals of other leftist governments in the region, but which will reach the Congress when the economy remains stagnant and there is a political storm over suspicions of corruption.

The deputies rejected the tax reform last March, in a hard blow for the leftist government that seeks to finance part of its program, campaign promises and promote social policies, such as raising the pensions of the poorest and paying off old education debts.

With the aim of financing social aid plans or boosting growth, Gustavo Petro in Colombia managed to approve a reform late last year and, in Brazil with Lula da Silva, the Lower House has already given the green light to a process to simplify the complicated tax system.

In Chile, Boric said that at the end of July he would reactivate the discussion in the Senate, where the government does not have a majority, which complicates a panorama in which the conservative opposition and businessmen have already expressed their rejection of raising taxes.

“It is impossible to think of policies or incentives for investment, for example, that do not touch the tax key. Perhaps we are going to have to travel a longer road, but our attitude is to continue working to build a fiscal pact”, said Finance Minister Mario Marcel, who has sought support in meetings with large and small businessmen.

The Confederation of Production and Commerce (CPC), which represents the large business unions, even said that “collecting through tax increases or new taxes is not the right path, since this prevents Chile from recovering its ability to grow.”

Activity contracted 2% year-on-year in May and for the whole year the Central Bank forecasts a performance in the range of -0.5 and 0.25% for GDP.

Marcel is in a marathon of conversations with business unions and political parties in search of support for the reform before sending the modified project, which in addition to raising some contributions, would include tax benefits, incentives for investment and growth, and modernization of the tax system.

“In order to materialize the fiscal pact and the reform, the Government needs the Senate to enable it by approving it by two thirds, but today those votes are not there”right-wing opposition senator José García Ruminot told Reuters.

The Government insists that economic growth is not enough to improve collection and that there are still significant gaps with respect to OECD countries, for example in personal income tax, but not corporate income, which is already high in Chile (27%).

The project rejected in March sought to collect 2.7 points of GDP and included adjusting income and wealth taxes, reducing exemptions, measures against tax evasion and avoidance, and increased spending on tax incentives. At the same time, a royalty for copper mining was considered, which was approved.

Until now the Government has not specified what will be the minimum collection to which it will aspire with its new initiative.

IN SEARCH OF VOTES

Since Boric took office in March of last year, the political scenario has changed, with the rejection of the draft new Constitution in September and the triumph of right-wing forces in May to lead the second attempt to rewrite it.

Also its popularity has fallen sharply since then.

“The Government of Chile was counting on the ‘Approve’ option to win and if that had happened the political environment would be different now. The government is at the mercy of what the opposition does.” said Andrés Pardo, director and head of strategy for Latin America at XP Investments in Bogotá.

And this was further complicated last month, with the discussion centered on how the State manages public resources after a scandal broke out over direct transfers of money from the Ministry of Housing to foundations linked to one of the official parties.

The case caused the fall of several officials and is in the hands of the prosecutor’s office, which is investigating whether there was embezzlement of public funds, tax fraud or other crimes.

In the Senate, the support of two thirds of the votes is needed to give the green light to the reform. If the initiative is rejected again, the Government may insist only in March 2024, at the beginning of the third of Boric’s four years in office.

“The latest known facts with a foundation make it a little more difficult to raise the discussion. But the government cannot be paralyzed (…) it must make an effort to get the votes”said the pro-government senator Ricardo Lagos Weber, who chairs the Senate Finance Committee, to Reuters.

For their part, businessmen and the opposition can argue that this is not the time to raise taxes when the economy is not growing, but also demand that the government ensure that public funds are used correctly, Nicholas Watson of London-based consultancy Teneo told Reuters.

“It will be difficult for the government to counter this reasoning given that public opinion has turned against Boric and the Broad Front. And this points to a deeper meaning of the scandal: corruption is especially harmful to this government because it presented itself as morally superior.

Source: Reuters