Chilean President Gabriel Boric at a commemoration of International Women’s Day in La Moneda, Santiago PABLO VERA (AFP)
The Chamber of Deputies this Wednesday rejected the tax reform of the government of Gabriel Boric. The Executive needed 78 votes to clear the first legislative hurdle, but received only 71 votes, while opposition reached 73 and abstentions 3. That failure is a hard blow for the left-wing government, as tax reform is a fundamental pillar of funding for the program that brought Boric into office in March 2022. The reform aims to collect 3.6% of gross domestic product (GDP) in four years, or about $10 billion, but that result will not allow the initiative to be presented again in the House of Commons for another year.
The path the government will take is not clear. Although the project could be resumed via the Senate, where it does not have a majority, Finance Minister Mario Marcel ruled it out this afternoon. “The idea that there is tax reform was rejected, that the funds generated by this tax reform would fund the increase in the universal guaranteed pension (PGU), the reduction in hospital rosters, the increase in funds for primary care and the nursing system created or to be developed. At the same time, every single component of the project was discarded,” Marcel lamented.
It was a fact that the right would reject the reform en bloc. In recent days, the opposition has hardened its tone against the proposal. So much so that the leader of the Independent Democratic Union (UDI) MPs, Guillermo Ramírez, assured that the tax reform projects, like pensions, “couldn’t be worse”. The Treasury Department and the General Secretariat of the Presidency, which handles relations with Congress, seemed confident that at least the first legislative process would pass smoothly.
The government planned to get a handful of votes from the Green Ecologist Party (PEV), Christian Democracy (DC) and the People’s Party, which ultimately didn’t happen. “It’s bad news for those who wanted to create a new political center or have declared that they want to because they entered the vote of the political right,” Marcel claimed. “Today we have a problem,” said MP Diego Ibáñez of Convergencia Social, one of the formations that make up Boric’s Broad Front, “how are we going to fund the social rights that citizens are demanding? We ask the right to be empathetic,” he added.
The goals of the reform are to increase both collection and progressiveness through a new fiscal compact. The project is divided into four major areas: Measures against tax evasion and avoidance; modernization of tax procedures; Changes in tax bases or tax rates —High Wealth Tax—; and benefits and incentives for taxpayers. The government had split the project to facilitate agreements and the project rejected today was the first to be voted on in the hall.
During the eight-month negotiation, the wealth tax was one of the points that met with the greatest rejection from the opposition and business. The reform introduces a tax on assets exceeding UTA 6,000 ($4.9 million) for residents or residents of Chile. Critics say the change, popularly referred to as a tax on the super-rich, could hurt investment and savings.
The harsh defeat suffered by Boric’s tax reform today comes just days before the end of the Boric government’s first year in office on March 11 and amid intense pressure for a cabinet change to take place in the following days. Before the vote, the Chilean President stressed the importance of the tax reform to finance pensions, with which the executive seeks to eliminate the “huge inequalities that have historically harmed women in particular”.
Ahead of the vote, which began on Tuesday, Marcel explained that the funds will be used to increase the universal guaranteed pension, reduce waiting lists in hospitals and increase funding for the regions and municipalities, among other things. “Tax collection in Chile is well below that of countries that are more developed today than ours, but also below the tax burden that these countries had when they had a per capita income like Chile’s,” said the socialist.
The bill was originally intended to collect 4.1% of GDP, but after months of negotiations in Congress and the inclusion of some 40 indications proposed by lawmakers, it was reduced to 3.6%. The survey, if approved, was expected to be 0.6% of GDP for 2023, 1.4% for 2023 and 2.7% for the third year of government. According to Marcel, the measures envisaged in the project would compensate for the reduction in collections in order to achieve higher investments, lower interest expenses and greater growth.
One of the major criticisms of the opposition, in addition to aspects of the content of the reform, relates to the moment. The government itself lowered its GDP growth forecasts for this year (-0.7%), 2024 (2.9%) and 2025 (2.9%) a few weeks ago. Estimates for 2026 and 2027 are 2.8% and 2.4%, respectively. Former President Sebastián Piñera criticized the bill over the weekend: “Trying to raise taxes by this magnitude in the midst of a stagnant economy with a growth crisis that is unable to create jobs is a mistake.” According to the ex-president, both the tax reform law and the pension reform law have “Garrafal” flaws.
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