In the context of the strikes that have interrupted the country’s normality, one of the protester’s claims has been to abolish the existing inequality in Chile. This claim is present in the media and in the streets through messages demanding an end to ‘privileges’.

Although not the only message, the claim for equality is the common denominator in demands including changes in the retirement system and an end to student debt.

Although between Latin American countries Chile ranks in the middle of the Gini coefficient scale, this does not mean much when considering the region is the most unequal of the world. As an example of the Chilean situation, In 2018, the 1% richest owned a 26,5% of the country’s GDP.^[1]

One of the proven ways to correct inequality is through taxation systems. In progressive schemes, those who have more, pay more. These resources are redistributed through retirement systems, public education, and health services among other public services. The progressiveness of each taxation systems around the world differs greatly.

Taxation systems have three main ways to raise money from the economy: capital taxation, corporate and individual income taxation, and goods and services taxation. Of these three main taxes, the taxation over goods and services (commonly called denominated Value Added Tax) is the most regressive. The Value Added Tax (VAT) charges people’s consumption equally,  independent of income level, and this way those who spend more of their income in consumption (the poorest) utilize a greater percentage of their income in taxes.

The VAT is preferred mainly by developing countries due to the ease of enforcement. In Chile’s case, 40,8% of global revenue in 2018 came from VAT revenue. In contrast, the OECD average is 21,3%^[2].

Moreover, between the OECD countries, Chile is one of the economies with fewer taxes as a percentage of GDP. In 2018, the global revenue represented 21.1% of Chilean GDP. The OECD average the same year was 34.4%^[3].

Not only does Chile’s taxation system raise fewer resources from the economy comparatively, but it does so in a regressive way. Considering citizen’s discontent towards politicians and institutions, and their demands, the need to change the tax scheme becomes obvious.

One proposal comes from former President Ricardo Lagos, whose idea would redirect a portion of revenues collected through VAT to the poorest. He also called for the issue of debt bonds by the Chilean State. While this proposal would make the taxation system more progressive and would signify steps in the right direction with some sense of immediacy, the proposal itself has left open the problem of financing student debt and lack of increase in pensions.

There are two considerations to consider when evaluating this proposal: first, any reduction over taxes, such as the VAT returnings, need to be counterbalanced on higher taxes in other areas; second, the option of raising corporate taxes is off the table since Chile’s rate is already comparatively high in the OECD context. In 2017, the Chilean Composite Effective Tax Rate was 31,1% of firms’ income, while the OECD countries’ average was only 21.1%^[4].

Given this scenario, one option could be to raise taxes in the mining sector; a second option is to establish taxes on individuals’ income through changes in our retirement system. Chile needs to move from a  private saving scheme (with an income floor called ‘Pilar Solidario’ financed mainly by corporate firm taxes and consumption taxes) to a mixed model, where part of an individual’s pension comes from their own retirement savings and an additional part from the solidarity of current workers.

The current social and political unrest means a more receptive society to progressive and ambitious proposals, which in any other scenario would most likely be rejected. My proposal is not original, it has been consistently brought forth by civil society organizations such as “No + AFP”. It is in the hands of civil society, but critically in the hands of current politicians to bring these demands into fruition for a more equal Chile.

^[1] La Tercera (2019). Cepal confirma alta concentración de la riqueza en Chile: el 1% más acaudalado es dueño del 26,5% del PIB https://www.latercera.com/pulso/noticia/chile-uno-los-paises-la-region-donde-mas-cayo-la-pobreza-2012-2017/485579/

^[2] OECD.Stat. (2019). Global Revenue Statistics Database. Data extracted on 08 Dec 2019 10:53 UTC (GMT) from OECD.Stat Available on: https://stats.oecd.org/#

^[3] This indicator includes charges over individuals to finance retirement systems.

^[4] Own elaboration based on OECD.Stat. (2019). Corporate Tax Statistics. Data extracted on 12 Dec 2019 15:51 UTC (GMT) from OECD.Stat Available on https://stats.oecd.org/#

~ The views represented in this blog post do not necessarily represent those of the Brandt School. ~