The Cautionary Tale of Chilean Tax Reform

While most countries in the OECD have labored to reduce taxes on businesses, there is one exception. Chile introduced tax reform in 2012 and 2014, which increased the corporate tax rates and added stricter anti-tax-avoidance rules. Over the decade before the tax reforms Chile had almost tripled its per capita income of $4,700 in 2001 to almost $14,600 in 2011. Since the tax reform of 2012, the Chilean economy began to slow, and by the 2014 tax reforms, the economy was retracting on a per capita basis. Now, Chile is faced with a recession, even as the global economy is beginning to grow.

Chile was considered the miracle of South America at the end of the 20th century. It emerged from a dictatorial regime under Augusto Pinochet with pro-market reform that opened trade with the rest of the world and brought inflation under control. These reforms, along with a return to democracy, set the stage for a massive economic expansion during the ’90s and drove Chile to become the largest producer of copper in the world. By the beginning of the new century, the per capita income of Chile leaped over its wealthier neighbor, Argentina, and remained $2,000 greater until the tax reform in 2014.

Since the return to democracy in 1989, Chile has averaged around 5 percent growth while its neighbor, Argentina, could barely maintain 2 percent growth. The flood of foreign direct investment (FDI), modern economic institutions, and stable economic growth placed Chile on a path to become a developed nation. Indeed, Chile joined the OECD in 2010, becoming the first nation from South America to sign an accession agreement.

During the presidency of Sebastián Piñera, a center-right politician, mass protests by students forced the Chilean government to reform the education system. As part of the education reforms, Piñera increased the corporate tax rate from 17 percent to 20 percent for 2013 and made the increase retroactive to 2012. These tax changes in the 2012 tax reform bill,…

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