Chile: Higher Tax Burden on the Way as Bachelet Appeases Student Lobby


EspañolThe president of Chile, Michelle Bachelet, signed a tax reform bill on Monday and signaled an historic shift of priorities for Latin America’s leading economy. The initiative is one of three policy priorities for the Bachelet administration and is her first major act since becoming president for the second time on March 11.

Chilean students protest for entirely taxpayer-funded and open-admission higher education. Source: Wikimedia.

Finance Minister Alberto Arenas will formally present the bill in Congress today, which seeks to raise US$8.2 billion to finance expanded government education — notably higher education.

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While the complete details will also be made clear today, its most important element is an increase to the corporate income tax rate from 20 to 25 percent, which places pressure on Chile’s position as a leading business climate. The bill also eliminates a tax break over the next four years, known as the FUT (Utilities Tax Fund), that applies to reinvested profits. The one respite, that signals an attempt to tax businesses rather than individuals, is a reduction to the top rate of the graduated income tax from 40 to 35 percent.

The proposed reform has already generated heated debate, even while constituents remain somewhat in the dark over its details. According to Interior Minister Rodrigo Peñailillo, though, the tax reform is necessary to “contribute to stability, governance, and at the same time, to defeat inequality that we need to become an inclusive country.”

Ricardo French-Davis, a PhD economist and professor at the University of Chile also weighed in with support. He told the newspaper Infobae that the economy is currently shrinking and that “it is necessary to bring inclusive development policies financed out of tax reform.… We must build a more inclusive economy that treats the middle and lower classes better.”

However, Alex Kaiser, executive director of the Foundation for Progress in Chile, warned the PanAm Post that this proposal will generate a “blow to investment, increase unemployment, slow the economy further, and will not solve any problems.”

Similarly, political parties such as the Independent Democratic Union and the National Renewal, along with various entrepreneurs, have warned about the signal this sends and the negative consequences for employment and investment in Chile.

Opposition criticism or not, though, Bachelet has a parliamentary majority in both the Senate and the Chamber of Deputies. Congress is set to approve the new law before May 21.

Last night, the new president held a national radio and television address to publicize the initiative (embedded in Spanish). She explained a long-term fiscal shift towards “social protection” and a more “equitable” distribution of government spending.

“We need to learn from the developed nations,” she said, presumably pointing to the European Union’s higher tax burdens and more expansive welfare states. News from the European Union remains bleak, though, as its unemployment rate remains above 10 percent, and multiple members such as Greece and Italy are experiencing major fiscal crises.

Bachelet’s actions stem from widespread student demonstrations that have grown since 2011. Most notably, participants have demanded fully taxpayer-funded education — including the elimination of for-profit institutions — and mandated open admissions. One prominent student protester, Camila Vallejo, is now a Communist Party member of Congress and in Bachelet’s coalition.

“[This initiative] will be the first thing her government does,” Kenneth Bunker predicted a day before Bachelet assumed power. A researcher at the Institute of Social Sciences at the University of Diego Portales, he says it is because she has to do it “before the students begin to move in April or May. It is the only way to slow them down and buy time to do other things.”

However, Kaiser does not believe that higher education should be funded by the state and rather “financed by each student.… There can be scholarships for talented students and a credit system,” he says, but his view is that education, contrary to the assertions of the president of Chile, “should not be free.”

Translated by Michael Cooper.

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