Revenue, Efficiency, and Equity Aspects of Major Taxes in Chile: A Preliminary Assessment

Abstract

This paper assesses selected revenue, efficiency, and equity aspects of Chile’s major taxes, i.e., the income tax, the value-added tax (VAT), and excises. Chile’s present overall tax burden, at about 20 percent of GDP, is in line with that in its neighboring countries. Whether any change from this level is desirable depends in a fundamental way on the public expenditure needs of the country without jeopardizing macroeconomic stability. Chile has a top personal income tax (PIT) rate (45 percent) that is at the high end of the international spectrum, and a corporate income tax (CIT) rate (15 percent) that is an outlier at the low end. The gap between these two rates (the income rate gap) of 30 percentage points could entail important revenue, efficiency, and equity costs that must be weighed carefully against any perceived or actual benefits. It may be worthwhile to undertake an assessment of the revenue and efficiency costs relative to the expected benefits of some aspects of the income tax system. Namely, saving incentives presently available, the cost effectiveness of the global complementary tax in achieving its revenue and equity objectives of taxing income on a global income basis, simpler ways of taxing capital and labor incomes, the introduction of royalties for the exploitation of natural resources. There are also a number of areas where existing policies could be reevaluated to enhance the efficiency and revenue potential of the VAT and excises. They include: (1) the special VAT credit to the construction sector; (2) the present exclusion of the excise revenue on many excisable goods--especially petroleum products--from the VAT base; (3) the role of the stamp duties and the VAT treatment of the financial sector; and (4) the appropriate excise burdens on motor vehicles and petroleum products for revenue and environmental reasons.