Some elements to consider in the upcoming tax reform.
The Chilean tax system has undergone multiple changes since the publication of the decree laws of 1974, which established the new institutional framework on the matter. Since that time, there were important reforms in 1984; also in 1990; in 2014 and 2021. In between, a series of modifications were introduced with different purposes, all of which have contributed to generating a labyrinthine system, fundamentally with regard to income taxes.
In income taxes, the current reality is a complex system, with several different tax regimes. For capital and business income, there are five different regimes: one for large companies; two for SMEs; one for taxation on presumed income and one for small taxpayers. System simplification is an important problem to address, given that complexity has implications for costs, both for taxpayers and the treasury.
The simplification of the system is an important problem to be addressed and solved by the tax reform that is announced. Complexity has an impact on costs, both for taxpayers (compliance costs) and for the treasury (control costs). Furthermore, the possibilities of evasion and avoidance increase with the complexity of the regulations. The announced disintegration of the system for large companies may be an opportunity for the necessary simplification, safeguarding that capital income pays an adequate tax, without discouraging the investment that is required for growth.
On the other hand, since the objective of taxes is to collect taxes to finance public spending, from Adam Smith onwards it has been proposed as a fundamental aspect that they be done on the basis of the principles of progressivity, that is, that taxes be taxed at higher rates. higher incomes, and lower incomes with lower rates, and equity, that is, that people who have the same contributory capacity have the same tax burden.
The problem is that currently the system has regressive characteristics that, instead of being solved, have been deepened by the latest legal modifications. In effect, the heavy burden that VAT represents on total tax collection reveals a regressive nature of the tax system, a situation that is a rarity among OECD countries where income and wealth taxes constitute the largest part of the tax collection. tax collection.
The situation is that people who have low incomes do not have the capacity to save and spend all their monthly income on the acquisition of basic goods (food, medicines, etc.) all subject to VAT. Consequently, this tax represents proportionally a greater tax burden for the most vulnerable population than for people with higher incomes, who allocate a smaller part of their income to the acquisition of said goods.
The challenge of the tax reform is that its design manages to combine the increase in revenue with the need for a more progressive tax system, as well as the requirement for greater investment for development.
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