When fall of General Augusto Pinochet dictatorship,

When Governments redesign or create new tax systems through a tax reform it requires balancing of multiple objectives; tax revenue to ensure financing for future government spending, the selection of correct tax instruments to address equity distribution and efficiency of the tax, as well as the ease of implementation and regulation. Yet countries governments still use taxes regularly to incentivise certain behaviour and achieve macro-economic objects one such being the equal distribution of income. This inequality in a nations income is measured through the use of the Gini index.

While Chile’s Gini index had decreased from 1990’s 57.3 to 47.3 in 2013 (World Bank, 2017) after the fall of General Augusto Pinochet dictatorship, which had been praised for its economic contributions to the country. However, even with the decreasing index, the countries income inequality is still high compared to countries outside South America, the top 1% earning 22% of national income (Fairfield & Jorratt, 2014). Therefore, president Bachelet decided to implement a new tax reform after being elected a second time Law No. 20.780 effective 1 October 2014 (EY, 2014. At the centre of this reform is the aim to raise 3% of GDP for improving financing for public education and other social programs, closing the structural deficit and improving tax progressivity as well as fighting tax evasion and avoidance (IMF, 2014) through the increased government revenue. Aiming to achieve this through targeting the income of corporations and high earning individuals, is one of the ways to boost better distribution of income and neutrality of the tax burden. The gradual increase of corporate tax from 21% in 2014 to 25% in 2017 through the Attributed Regime and from 21% in 2014 to 27% in 2018 in the Distributed Regime including the closing of certain tax exemptions (EY, 2014) helping to raise the required government revenue. The tax reform also sets out to gradually reduce the maximum personal tax rate from 40% to 35% within this period of 4 years (TeleSUR, 2014). This period of 4 years giving corporations time to adjust to these changes, including to exhibit the broader implications of the higher taxes to improve lives speculating this will not deter firms from continuing to invest in Chile’s economy.

The removal of the previously present tax exemptions if firm’s profits were re-invested into Chile is a serious threat to the continued investment of firms as this reduces an incentive to do so. Being a primary factor for the future reduction of economic growth after the implementation of this tax reform. El Mercurio (2016, in VisualPolitik, 2017) stating that the Chilean economy only grew 1.5% in 2016 and 2017 estimations being only a growth of 1 to 2%, while this may be around optimal for some more developed European countries. Chile faces high unemployment with this minute economic growth preventing younger population to find jobs. While new firms are having difficulty to gain a foothold facing one of the highest tax on corporate profits as a percentage of GDP averaging at 4.24% between 2014 and 2016 being a full 1.45% higher than the OECD countries averages for the time frame (OECD Data, 2017). While raising overall taxes in the quickest way to raise revenue of the planned spending on the development of public education. Such unfavourable taxes are not beneficial in the long run as they drive away and prevent the sustainability of the revenue generation from corporations. This paper focuses on and discusses the effect of Chile’s 2014 tax reform on the nations income inequality and economic growth, giving us better insight to possible ways tax systems could become more future proof and what could be altered to improve the outcome of this tax reform.

The Chilean tax reform had several flaws in both its execution and implementation. The whole tax reform relying on the continuous presence of firms. Firms being essential to the Chilean economy as it is largely based on exports of copper making up roughly half of them, its prices falling drastically worsens the economic situation (Reuters, 2015). Thus, the increase of corporate tax having a detrimentally larger impact on firms than it would have in a normal profit cycle. Chile needing to diversify its economy to already make up for the decrease of taxable profits despite the private sector understanding the need for tax as a means to fund public education supplying educated labour (CGTN America, 2014). Moreover, the tax reform was inherently complicated especially to the Chilean population as well as firms needing to change multiple aspects of the reform in December 2015 as certain measures were already proving to be too complex to implement a year after its initiation (KPMG, 2014). Stating the double taxation system of the attributed and distributed regime, general anti-avoidance rule (GAAR) as well as redefine certain transitioning rules, they have stated however that it would not result in a reduction of tax rates or projected received revenues from the reform.


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