(Bloomberg) -- Chile’s lower house unexpectedly rejected the government’s flagship tax reform that would have created the nation’s first levy on wealth and aimed to finance a series of spending increases, dealing another severe blow to 37-year-old President Gabriel Boric.
The proposal fell short of the 78 votes required to pass, with only 73 in favor. While the government can now present the reform in the Senate, dissent in the upper chamber is likely to be even stiffer than the Chamber of Deputies. Moreover, to insist on the same text, it would need the support of two thirds of lawmakers, instead of a simple majority.
The proposed tax increase was the basis for policies put forward by Boric to reduce inequality and boost social services, the issues that swept him to power just 12 months ago after year’s of social unrest. The vote was a surprise to the government, coming just days after Finance Minister Mario Marcel said he was convinced that the bill had enough support to pass.
“It’s an enormous failure by the government,” said Mauricio Morales, a professor of political science at Chile’s Universidad de Talca. “It’s inexplicable that the government hadn’t negotiated the votes beforehand.”
Chile’s peso and swap rates traded mixed after the vote, while stocks edged higher as investors analyzed the implications for fiscal policy.
Heavy Blow
The government had no immediate way out of the dilemma.
“This is bad news for people who wanted a fairer tax system,” Marcel said after the vote. “It’s an issue of major importance for economic and social policy. We are not right now in a condition to define the next steps to follow.”
The vote comes six months after Chileans rejected a new constitution that enshrined many of the social rights that Boric had built his election campaign around.
“If, at first, the completion of the government’s program depended on the new constitution, and then on the tax reform, then the government won’t be able to fulfill its program,” Morales said. “It’s as simple as that.”
The proposal aims to raise revenue equivalent to about 3.6% of gross domestic product. The text establishes a wealth tax on people whose capital exceeds US$4.9 million, with a variable rate ranging from 1% to 1.8%. It also eliminates some tax exemptions, increases income taxes for those who make more than US$5,300 a month, sets investment incentives and new mechanisms to penalize tax evasion. Lawmakers are debating a separate tax bill for the mining industry.
The wealth tax is one of the most controversial points. One of Chile’s main business organizations, the CPC, has proposed raising the tax on corporate profits rather than introduce a wealth tax.
Chile has among the lowest tax rates on personal income among the 38 countries in the Organisation for Economic Co-operation and Development, and above the group’s average on levies for corporate profits. Meanwhile, only Colombia, Mexico, and Ireland were below Chile in tax revenue as a percentage of GDP in 2021, according to data from the OECD.
(Updates with analyst comments starting in the fourth paragraph, finance minister comments in the sixth)
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