Boric’s Tax Policy for Chile May Be His Legacy or His Failure

When Gabriel Boric came to power in 2022, his followers hoped that the student leader turned president would bring a new way of conducting politics by not compromising. Compromise had been a staple of Chilean politics since 1990, and while effective, voters weren’t happy with the speed of progress.

This uncompromising approach is well represented by one of the architects of Boric’s presidency, former student leader turned minister Giorgio Jackson. Jackson stated that his political generation was different and superior in values and principles to its predecessors, regardless of whether they were from the previous center-left or center-right governing coalitions. Compromise, or the well-established art of politics, became something morally questionable.

The Mission

Against this background, and within the first year of its four-year tenure, the government went full steam ahead, advocating for:

• A new constitution, now defunct, that would politically and culturally reshape Chile;
• A pension reform wherein a new public institution, instead of the existing private pension funds, would manage an additional 6% contribution borne by employers;
• A health-care reform wherein private insurance companies would have to stand back and act as a back-up to a public insurance institution that would be entitled to receive a 10% contribution; and
• A major tax reform that would increase tax revenue by 3.6% of the gross domestic product.

Who Loses If Boric Gets His Way?

Boric’s tax reform wasn’t one to particularly worry foreign investors. It had strong measures that would further enhance the powers and discretion of the Chilean tax administration, thus threatening the notion of legal certainty. It also favored measures that would undermine investment activities, such as an interest-like tax on undistributed earnings by local passive investment vehicles. It wasn’t pleasant, but it wasn’t brutal.

Boric’s tax reform was one where foreigners from tax-treaty countries and the US maintained a privileged status, separating them vastly from their local partners. Chilean individuals, on the other hand, saw the threat of wealth taxes, a new 22% tax on capital income that would take their tax burden to 43.06%, and higher individual marginal tax rates for high-income earners, among other measures.

The tax reform under Boric wasn’t just intended to raise tax revenue, but would also, through taxation, forcefully reduce the wealth inequality that so profoundly upsets this administration. With a majority in Congress but not in the Senate, the expectation was that Boric’s tax reform would receive swift approval in the lower chamber, for real negotiations to start once it reached the experienced and tempered senators. This expectation was all wrong.

The Outcome

On March 13, Boric’s reform was due to be voted on; however, for the first time since 1990, a debate on tax reform wasn’t allowed. While rejecting a debate and vote on the content of a bill of law is controversial, this has been proposed in the past, even by a sitting president against the administration of his predecessor. For Boric’s government, this rejection meant three options: Go to the Senate with a supermajority and force the debate; wait a full year and send the same bill of law again; or start over.

After this outcome, which was followed by the chaotic firing of five ministers and 15 deputy ministers, the government declared it didn’t intend to continue with the exact same bill and would start a consultation process.

What Now?

All the legislative measures proposed by the government depend on new financing. Without new tax revenue, some expect the government to rush to approve a new mining royalty that would collect 0.42% to 0.6% of GDP, new green taxes that could collect 0.2% of GDP, and to benefit from the boom in demand for lithium which should bring in an additional 2% to 2.5% of GDP this year alone.

That said, this wasn’t just a defeat from a revenue perspective, but it also was symbolic. Mario Marcel, in his capacity as Minister of Finance, made that clear when he declared that the rejection of the tax reform was being celebrated by those who evade taxes, and their advisers. With such a characterization, and the government unable to pursue the evaders and their advisers through the legislative process, it would be reasonable to expect an increase in aggressive audits and challenges from the Chilean tax administration. At the end of the day, the government still needs revenue to meet its promises.

On the bright side, a legislative failure for the government does provide a humbling opportunity to consider whether the uncompromising policies it seeks are the best approach to real politics.

In that regard, some economists have reiterated the need to stop looking at corporate taxation and instead look at the meager revenue collection from personal taxes, due either to an excess of tax brackets, a steep 28% figure for informal or gray work, or a comprehensive personal tax exemption that some consider unjustifiable for a country that has the highest GDP per capita in South America.

While Boric has become known as a president willing to change direction 180 degrees as he matures in the role, it remains to be seen whether his administration will seize the opportunity and get to work across the aisle on a reform shaped by the same compromises his coalition so fiercely denounced.

If he were to do so, his tax legacy would overshadow that of his two immediate predecessors, Michelle Bachelet and Sebastián Piñera. The explanation is simple: neither Bachelet nor Piñera faced a total defeat from a legislative perspective on taxation, which is why both approved badly drafted tax bills that gave birth to a system with no clear policy or purpose.

Having seen what total defeat is, Boric has the unique chance of sending a comprehensive and cohesive bill to Congress. Maybe finding a compromise won’t sound so morally dubious anymore.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Ignacio Gepp is a Partner with Puente Sur in Chile.

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