Chile: Bachelet Fails First Test of New Term by Raising Taxes

Michelle Bachelet, president of Chile, is reforming the country’s education system and paying for it by raising corporate taxes.

Bachelet aims to increase the corporate income tax from 20 percent to 25 percent, which would collect approximately $8.2 billion, or roughly 3 percent of gross domestic product. Bachelet also plans to eliminate the “taxable profits fund,” which allows investors to defer taxation to re-invest in the Chilean economy. The new system would tax profits at 35 percent and eliminate any tax incentive for reinvestment in Chile.

Bachelet declared that her goals for tax reform include increasing the tax burden on corporations, improving income distribution, encouraging savings, and decreasing tax evasion. Chile’s annual growth is already expected to slow to 3 percent from 4.1 percent in the coming year.

The spike in corporate taxes could further shrink economic growth during a particularly vulnerable time for the economy. Over the past decade, the country’s export market has been highly reliant on Chinese demand for copper. Raising taxes as China’s economy slows and the price of copper falls could compound economic difficulties.

But Chile has consistently been a global leader in economic freedom according to theIndex of Economic Freedom, co-published by The Heritage Foundation and The Wall Street Journal. Bachelet’s proposed tax reforms have the potential to undercut Chile’s economic freedom and its attractiveness in the global market and divert the country away from the path of economic liberalization that has made it the richest nation in Latin America.

Corporate tax increases could also discourage foreign direct investment in Chile in favor of other countries with lower tax rates. Higher tax rates cause countries to think twice before investing in a country. Asia, where tax rates are more competitive, is an increasingly attractive alternative.

If Chile wants to maintain its position as a beacon of economic freedom and prosperity in the Americas, it should continue its model of free-market economics with competitive corporate tax rates and incentives that attract foreign investors.

Ashley Wright, Andrea Rodriguez, George Margulies are currently members of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, pleaseclick here.