CHILE: Business Tax Hike – Short-term or Permanent?

By Daniela Estrada Reprint | | Print |

Daniela Estrada

SANTIAGO, Apr 21 2010 (IPS) - Chile’s right-wing President Sebastián Piñera is seeking congressional approval of a plan to finance the reconstruction of the country in the wake of the devastating Feb. 27 quake, which includes a temporary tax on business that the centre-left opposition would like to make permanent.

“That will be the struggle over the next few weeks: whether this will be a short-term measure focusing on reconstruction or a deeper reform,” political scientist Robert Funk, assistant academic director at the University of Chile’s Institute of Political Affairs, told IPS.

“But the government is in a better position on this argument,” he added.

Above and beyond the current circumstances, Funk believes it is necessary to increase tax revenue in order to establish “a modern, development-oriented state,” as demanded by society and required by Chile’s recent admission to the 30-member Organisation of Economic Cooperation and Development (OECD), known as the “rich countries club”.

Piñera, of the right-wing Coalition for Change, presented on Apr. 16 a plan for financing the reconstruction of the areas of the country hit by the devastating quake, one of the strongest ever recorded, which left 500 people dead and thousands homeless, mainly in the southern and central regions of O’Higgins, El Maule and Bío-Bío.

The new president took office on Mar. 11.

The president caused some surprise by proposing a three-point increase in the tax on business – a move that had been continuously rejected by the right over the last two decades of government by the centre-left “Concertación” or coalition of Parties for Democracy.

In 2011, the tax would go up from the current 17 percent to 20 percent, but it would be reduced to 18.5 percent in 2012 and would return to 17 percent by 2013. Some small and medium-sized companies would be exempt.

The government also proposes increasing the tax on the mining industry, under a flexible scheme which companies could voluntarily adhere to. It is also seeking a permanent increase in the tobacco tax, from 60 to 67 percent.

In addition, the plan would incorporate a two-year surtax on real estate assets worth more than 190,000 dollars.

Finance Minister Felipe Larraín has insisted that the tax hikes, which would bring in one-third of the funds necessary for reconstruction, are “exceptional” and that most are temporary and are merely due to the emergency situation.

The government estimates the public and private cost of reconstruction at 30 billion dollars, 21 billion of which are due to infrastructure loss.

The public sector is to provide 8.43 billion dollars, and under the government plan this would be achieved over the next four years.

To collect that revenue, Piñera also proposed budget reallocations, private donations, small sales of “non-essential” public assets, emissions of internal and external bonds, and the use of part of the billions of dollars in windfall copper profits socked away in a rainy-day savings fund.

The plan also includes benefits extended to companies, such as accelerated depreciation, which offers business faster write-offs for what they spend in 2011 and 2012, leading to lower taxes.

The parties of the centre-left Concertación have said they plan to vote in favour of Piñera’s measures.

However, some leaders of the opposition coalition said the current circumstances provide a chance to discuss permanent tax reforms.

There has also been self-criticism within the opposition coalition, because the initiative emerged from the right-wing government and not the Concertación.

“We never managed to do this, and it is embarrassing that the right is today proposing a tax reform that our ministers weren’t even capable of carrying out,” Senator Guido Girardi of the Party for Democracy, which forms part of the Concertación, said on Monday.

Funk said the tax increases proposed by Piñera actually challenged the president’s own political base. “Within the right itself, they are saying the current administration looks like the ‘fifth’ Concertación government,” he said.

Piñera, a business tycoon with a fortune estimated at 2.2 billion dollars, has been constantly accused of setting up a cabinet that looks more like a board of directors, consisting of managers and executives, while multiple conflicts of interest have been denounced by the opposition and the media.

Funk said these extremes are a result of Piñera’s “pragmatism.”

“What has characterised this government is the scant importance it puts on ideology, on political parties,” he said.

A week ago, the government sent Congress another draft law aimed at drumming up revenue to mitigate the effects of the earthquake. The bill would create a national reconstruction fund and establish incentives for donations.

But the initiative has drawn criticism from legislators and activists. In a column, Álvaro Ramis, the head of the Chilean association of non-governmental organisations, ACCION, complained about the absence of civil society, for example, on the board that will administer the reconstruction fund.