Patricio Barra Michael
Jorratt Division of Studies · Servicio de Impuestos
Internos E-mail addresses: pbarra@sii.cl , mjorrat@sii.cl SANTIAGO/CHILE IN D E X
I INTRODUCTION The objective of this report is to analyze and describe the main features of the Chilean tax system from an international comparison perspective. This report will focus on the internal tax system of Chile and consist of four aspects: tax burden, tax stucture, efficiency and equitability of the tax system. Additionally, and to compliment the study of these aspects we will touch on the themes of tax evasion and tax administration in Chile. In respect to the first two aspects, tax burden and tax structure, statistics will be constructed such as for example the level of taxes that fall on the economy, the income-consumption composition within the tax system and the level of the VAT and of income taxes imposed. Also we will make comparisons of taxes paid by households of different countries and of different income levels. The data utilized comes from different international publications and from direct consultation with the different tax services. The selection of these countries has been done in an arbitrary manner taking into account economies that would be of special interest to compare with the Chilean model. Comparisons with developed countries, Latin American countries and emerging nations of Asia will be included. It must be taken into account however, that the studies can be somewhat limited in scope in some cases due to the lack of availability of information. Because of this, in some sections the number of countries will be less than in others. In the aspects of efficiency and equitability it is more difficult to make quantitative comparisons between countries. Here, the characteristics of the Chilean tax system will be described in their greater or lesser orientation towards the general principals of efficiency and equitability. After reviewing all these aspects it can be concluded that our tax system, at least compared with the majority of countries, brings together a combination of desirable attributes from the perspectives of the economy and administration of the system. Though it shows some areas that merit further study of their improvement. II TAX BURDENDuring the analysis of the tax system the first question that needs to be answered is determine if the taxes that are imposed in an economy are of a elevated or a medium or a low level. The tax burden that measures the collected tax revenue as a percentage of the GNP enters as a first record in relation with this question. This indicator is a measure of how many goods and services are given to the state each year so that it can complete its functions. As can be seen in Graph No. 1, in 1997 the net tax revenue in Chile reached 18.5% of the GNP. It should be pointed out that the tax burden in Chile is lower than those of the developed countries and higher than the majority of the countries in Latin America. Some Asian countries are included in this graph to amplify the comparison, those that have tax burdens that are both higher and lower than the Chilean model. It should be pointed out that the tax burden is only a partial indicator of the tax system in the sense that it only considers taxes actually collected. To make a truly complete comparison the level of tax evasion must be taken into account, that is, what percentage of taxes imposed are actually paid. In Chile, for example the total rate of evasion borders on 26%, a level that is lower than the rest of the countries of Latin America. Therefore it should not be concluded that because the fact that the tax burden is higher than the rest of the countries that the tax rates also will be higher than the rest of countries. Later on, it will be observed, that in Chile the tax rates are equal to or even lower than in the rest of Latin America, but that their payment is completed more strictly than in the rest of Latin America.
Source: Put together by the Division of Studies of the SII based on "Government Finance Statistics Yearbook" IMF-1996 and on "International Financial Statistics" IMF-1997. Notes:
III THE STRUCTURE OF THE TAX SYSTEM Next we will analyze the structure of the Chilean tax system in terms of what is collected by each type of tax. In graph No. 2 the tax revenue amounts for 1997 are shown. In total they represent a collection of US$13.640 million. Of this amount 17% is collected by the business income tax. This includes the First Category Tax at the rate of 15%, the additional tax by foreign businesses and the additional tax that is paid by the state enterprises. The personal income tax which includes the Second Category Tax, and the ‘Global Complementario’ Tax, represents 8.7% of the total collected. The VAT represents 41.7% of the total collected. The Consumer Special Taxes (Alcoholic Beverage and Non-Alcoholic Beverage Taxes, Vehicle Taxes, Luxury Taxes, Tobacco, Cigarette, Cigar Taxes, and Fuel Taxes) make up 13.8% of what is collected. Customs duties make up 11.1% of the tax revenue. Graph No. 2 shows a line called ‘Payment System’ that adjusts the owed tax burden with what is actually collected. Determining in this form all sources the total collected reaches US$ 13.640 million for the year 1997.
Source: Put together by the Division of Studies of the SII based on the National Fiscal Income report of the National Treasury of the Republic and of the Budget Directory. Notes:
To compare the Chilean tax system structure with those of other countries we present in Graph Nº 3 how much is collected in income taxes and consumer domestic taxes as a percentage of the GNP. Chile is one of few countries in which relatively little is collected in the way of income tax, only 4.7% of the GNP. In the traditional developed countries the amount that is collected in the way of income tax is much higher. In countries such as South Korea and Singapore and even in some Latin American countries where can be observed amounts of income tax greater than in Chile. In fact the average for all the countries shown is at the level of 8.2 percent of the GNP. On the other hand while comparing the consumer domestic taxes the situation is in reverse. In the Chilean tax system these taxes represent more than 10% of GNP. This percentage puts our country in a similar situation to those of some European nations. In Chile, the VAT represents almost 80% of the consumer domestic taxes. The important collection of this tax is explained in part because its rate is relatively elevated, but above all because it responds to a unique rate applied over a substantially large base. We must also add that in Chile the rate of evasion of the VAT is much less than in the rest of the Latin America countries.
Source: Put together by the Division of Studies of the SII based on "Government Finance Statistics Yearbook", IMF-1996 and "International Financial Statistics", IMF-1997. Notes:
3.2. Structure of The Tax Rates
The legal structure of the VAT is a standard rate of 18% that taxes the sales of goods and service industries in the economy. The tax has limited exemptions, principally in the area of personal services and there also can be found special rates applied on certain consumer goods. In graph No. 4 the VAT standard rate of each country is compared pointing out that the VAT rate of Chile at 18% is higher than the average VAT rate shown for the other countries which only reaches 13.7%. Nevertheless, it should be pointed out that at a Latin American level the general rate of VAT in some countries such as Uruguay(23%) and Argentina (21%) are even higher than in our country.
Source: Put together by the Division of Studies of the SII based on "Corporate Taxes: A Worldwide Summary", Price Waterhouse-1996. Notes:
The Chilean tax system uses a structure of progressive rates to tax the income of employees. The same as in the tax systems of the majority of countries. This tax is called the Second Category Unique Income Tax. It considers 7 income brackets. The first income bracket includes incomes less than US$ 550 monthly. The marginal maximum rate is applied at 45% for income of more than US$ 6,600. In the international context the marginal maximum rate of 45% of the Chilean tax system appears to be relatively high, (graph No. 5 ) taking into account that the marginal maximum rate average for the countries together is only 31.8%. Nevertheless in countries like France (56.8%) and Spain (56%) the marginal maximum rate is higher.
Source: Put together by the Division of Studies of the SII, based on "Personal Taxes: A Worldwide Summary", Price Waterhouse-1996.
2 Corresponds only to the structure of federal rates.
The comparison of the previous column does not consider the income levels in which these rates begin to be applied, nor do they consider the existence of exemptions, deductions or tax credits that reduce the personal income tax burden of the taxpayer. Because of this it would be appropriate to compare average rates of the personal income tax, taking into account these elements. In graph No. 6 there is a comparison of how much in taxes a household pays in different countries and with different income levels. This estimation has been obtained supposing that a resident family in a country is composed of a married couple with two children, with income solely of domestic origin. In scenarios 1 and 2 it is considered that the total of household gross income is earned solely by one of the parents, and that 100% of the income corresponds to a salary as an employee. Scenarios 3, 4, and 5 consider that 75% of the household gross income is earned by the main taxpayer whose income is 88% derived from a salary earned as an employee. The other taxpayer who earns the remaining 25% earns all of it in the form of a salary as an employee. The average income tax rate considers the taxes on income, national as well as local, expressed as a fraction of household gross income. The details of the methodology and the assumptions made in the estimation can be consulted in annex No. 2, included at end of this report.
Source: Put together by the Division of Studies of the SII, based on information given by tax authorities of the countries and "Individual Taxes: A Worldwide Summary - 1996", Price Waterhouse. Notes:
The results of this exercise contradict something that has been considered true in recent times, that is that in Chile the personal income taxes are very high, especially those for people of higher income. In the higher income level the family that receives US$ 15,000 per month pays at the rate of 23.1%. Even though this is higher then in Argentina (9.0%) it is similar to what would be paid in Asian economies such as Malaysia(22.4%) or Indonesia (24.0%). And it certainly is lower than in Canada (41.0%), Spain (34.8%) and the USA (31.5%). The behavior of these rates while lowering the family income reveals that tax system in our country applies averages rates clearly lower than in the rest of the countries. For instance, in the scenario of taxpayers earning US$ 2,500 per month the average rate is lower than in the majority of the countries. |
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