President Boric’s New “Fiscal Pact”: The Political Trench Dispute That Will Impact the Exit Plebiscite

“We are clear that a new social pact requires a new fiscal pact. Over the next few weeks, I will present a tax reform to Congress. This is a fundamental step because it will serve to finance the fundamental reforms that we have committed,” said President Gabriel Boric, on a national network broadcast last night on radio and television at 9:00 p.m., an opportunity in which he communicated to the citizens his decision to send Congress a package with various tax adjustments to collect between 4 and 5 points of the Gross Domestic Product (GDP), what he had already advanced during his first Public Account, developed at noon on Wednesday before the Plenary Congress.
In this way, the President tied the future of his presidential announcements to the success of a reform in a matter that always wears and polarizes. But the Head of State – in the opinion of the experts – transparently assumed the need to undertake the task, showing himself aware of the most pressing needs of the population in a pandemic scenario, as well as the chronic shortcomings of a society that exploded in 2019. And he trusts – analysts believe – that the businessmen are clear that their failure is a cluster bomb capable of reaching them too, so this “tax pact” well seems to behave as a call to sanity for the economic elites.
“Only societies that have been able to generate a solidary fiscal pact – where those who earn more, contribute more – have been able to conquer prosperity and development, which is nothing more than the care and protection of each of the members of our society. This reform will not be against anyone, but in favor of Chile, and we hope to have your support to be able to carry it out,” added the President, who decided to undertake this difficult mission, despite the fact that all the polls show it with increasing levels of disapproval.
That being the case, any implementation of its programme will depend on that reform. And this was confirmed by several of the ministers who accompanied the President to the National Congress, among them, Carlos Montes, head of Housing and Urbanism, on whose shoulders weighs the mission of building 260,000 homes by 2026, in order to mitigate the severe housing crisis that affects the country, a deficit that steepens above 650,000 units and that threatens – as he himself acknowledged to El Mostrador – with leading to lead to a new social explosion.
Not to mention the pressing needs in public safety, health (including mental health), education, infrastructure and connectivity; or regarding the new deal that it intends to promote with the native peoples. Only the most contingent announcements made by the President in matters such as public security, social rights and inclusive development require an investment of $708.1 billion. Policies such as the forgiveness of the CAE and the restitution of land to indigenous communities have a much larger order of magnitude. In fact, the forgiveness of the CAE would require an investment of US $10.2 billion, according to Acción Educar. But, all of them are matters that imply a high fiscal cost, although at the same time they provide the unparalleled opportunity to pacify a country and reverse the climate of disapproval that the polls show.
In order to finance its program, the Government – and especially the Minister of Finance, Mario Marcel – has set its sights on three aspects: combating phenomena such as tax avoidance and evasion, where changes are predicted in the figure of the “presumed income”; applying new levies on high incomes and assets, in order to move towards a progressive tax system; and, finally, to apply an increase to the mining royalty, a matter in which there would be quite advanced efforts in the Senate, some of whose members were key to averting the threat of nationalization that arose since the Constitutional Convention. The same goes for the application of “green taxes”.
A testimonial advertisement? Not at all, agree the analysts and experts consulted by this means, since the idea of promoting such tax adjustments occurs in an atypical context, of a lot of crisis and convulsion, and that could favor the progress of these initiatives. But not only that, because the analysts consulted believe that the mere fact of installing a conversation with issues such as “tax justice” and “social rights”, may well benefit the option of the Approve in the plebisciStarting date set for 4 September.
A debate that has already ignited in Congress and academia
However, no one knows in detail the bills that will be sent separately to Congress. And this was recognized by the president of the Finance Commission of the Chamber of Deputies, the socialist Jaime Naranjo.
“So far we have only heard brushstrokes from the President and from the Minister (of Finance, Mario Marcel), in the sense that today, as in the Senate there is a project on the mining royalty, which will continue its course independently of the tax reform, which will enter the Chamber of Deputies and that we will see in the Finance Committee (…), and where that tax reform would have all the ingredients that the minister and President Boric have expressed, both in terms of taxing people’s assets, as well as some green taxes to contribute and help climate change, “said Deputy Naranjo.
Does this tax reform represent a window of opportunity for the President? “It is a necessity, it is a practical and inevitable thing that it is in the first order of the hierarchies,” said liberal deputy Vlado Mirosevic, who recalled that “the State is with few resources” as a result of the pandemic, and that the unmet needs of the population can explode at any minute, he added.
The political analyst and academic Marco Moreno, for his part, said that President Boric’s bet is completely understandable, since “it responds to this idea that politics requires making offers to add support, and somehow what the President did is to make a set of proposals – out of a hundred initiatives – he announces results regarding those proposals, and its management is going to be evaluated for it.”
And Moreno added: “Financing is required to do everything he proposed, and those resources must be taken from somewhere and the way to do it is with this project that seeks to be able to order the tax issue, after the reform of Michelle Bachelet, on which everyone agrees that it was not a good reform, and it was done at the beginning of his second term.”
“We need to make this new tax pact, just as we promote a great agreement regarding the minimum wage,” said Deputy Mirosevic, who called on the business community to remember what we experienced from October 18, 2019, a loophole that is still far from being extinguished.
“The President is calling for a great tax pact, which is the beginning of a new social pact along with the new Constitution,” he added. The idea of the “tax pact” does not bother, for now, the opposition parliamentarians, but obviously raises doubts about the orientation that President Boric wants to give him. Felipe Kast (Evópoli), a member of the Senate Finance Committee, said that such a pact would perhaps serve to give greater legal certainty, “because it already happened to us once, that they made a tax reform (during the second Government of Michelle Bachelet) and half of what was estimated was collected, because economic growth was reduced, “because economic growth was reduced, ” Said.
However, Kast opted for a pact “pro investment, pro economic growth and pro collection, because if there is no economic growth, there is no collection. That discussion, which is longer, I expected to have with Minister (Mario) Marcel and unfortunately so far we have not had any sign of pre-legislative dialogue with the Minister of Finance. On the contrary, they have started a series of conversations among themselves,” he said, marking the clear and irreconcilable views that weigh on a matter where it is difficult to balance growth and redistribution.
The executive director of the Center for Financial Studies of the ESE Business School of the University of Los Andes, María Cecilia Cifuentes, estimated that it is necessary to wait to see these reform projects before elaborating a more detailed analysis, although she warned about the complications experienced by the Chilean economy, especially with respect to inflation, so that too ambitious projects could be counterproductive for growth and, in short, for the same collection that the Government intends to increase.
“I am concerned about the lack of legal certainty. The important thing is that investors know what the rules of the game are, because so far the promises made, on the occasion of other reforms, have not been fulfilled at all. I think it would be best to take more time to reach a consensus reform,” Cifuentes added.
Senator Daniel Núñez (PC), also a member of the Senate Finance Committee, asked to avoid ideological excesses and to address with all pragmatism the problems that, if not properly resolved, can generate a picture of such instability, capable of ruining por complete the business climate.
“It is fundamental (the reform) to generate the permanent resources to make dignified improvements: to improve public health and all the matters that have accumulated, such as the issue of housing. It is the responsible and serious thing,” said Senator Núñez, also recalling that the pandemic not only worsened with the most disadvantaged, but also implied an excessive expansion of benefits to people with greater resources.
By the way, according to the latest Casen survey, poverty in Chile went from 8.6% in 2017 to 10.8% in 2020, which means that today we have approximately 2.1 million people who are under this line. The same survey, applied in the midst of the pandemic, showed that the income gap between the top 10% and the poorest 10% is the largest ever seen in Chile.
“They seem to me pertinent measures,” said economist and academic Rodrigo Montero, dean of the Faculty of Administration and Business of the Autonomous University, who was in favor of making these adjustments, “but without damaging investment incentives.” However, Montero emphasized an aspect that no one talks much about: the weak intrusive tools that the Internal Revenue Service (SII) has to comply with the control of the highest assets.
“It is necessary to strongly enhance the supervisory role of the SII, provide it with more tools and improve productivity levels from the point of view of detecting this type of situation that, beware, test the audit teams not only in Chile, but in countries around the world,” he said, but not before expressing his doubts about the possibility of achieving an efficient design to “tax high incomes, something that is complex, since these assets have more tools to overcome that greater tax burden,” he said.
“It is one thing to announce the axes, but we have to see the depth of the changes that are proposed,” said the economist and researcher at the Sol Foundation, Marco Kremerman, who – with learned distrust – clarified that “a mining royalty with a low percentage of collection is not the same as one that can tax the sale and exploitation with a percentage similar to that which was approved in the last bill processed in the Chamber. of Deputies (3% was approved for sales, not profits), but that bill stalled and was denatured in the Senate. In vat and income tax avoidance and evasion, there are 7 points of GDP, and the idea is to reduce that by 2 or 3 points. Anyway, we’ll see what those tools are.”
“It’s important to see what the teeth are sharpened by the Internal Revenue Service,” added Kremerman, who suggested that, in terms of avoidance and evasion of the Income Tax Act, you can increase the marginal rate of the complementary global tax or, well, disintegrate the tax system completely, “which allows two-thirds of the taxes that companies pay to be discounted by the owners of those companies when they pay taxes. as natural persons”.
Likewise, the economist invited the Government to look at the “property taxes themselves for wealth exceeding 5 or 10 million dollars. It remains to be seen what the guarismo is and how they will determine the financial patrimony. The most important thing is to know those tools. Only there could we say, effectively, if we can collect those 4 or 5 points that the Government wants to collect.”

Is there scope to raise more? Kremerman replied, “The margin is very wide, given the anomalous nature of the Chilean tax system.”
Where does the silver come from?
By the way: the presidential announcement helped to make visible the eternal debate on taxes, a discussion that lies at the core of the ideological differences between right and left in all parts of the world. In this, the right in Congress was more orthodox, since it insisted on putting more emphasis on budgetary adjustments and the efficiency of spending over the application of new taxes.
“Clearly here, to finance different measures, there are basically three paths: one is economic growth; the second is to change the parameters of a tax reform; and the third is to make the State more efficient. And unfortunately we did not see any announcement of modernization of the State, therefore, I think that, just as you want to ask people to pay more taxes, I think that the State also has to do its part and make the use of it more efficient, “said Senator Kast, an economist by profession.
He added: “Worse, instead of reducing the number of ministries, the creation of two ministries was proposed, which I think is extremely worrying.and. At least on our part, if it does not go hand in hand with a reduction in bureaucracy, it will be very difficult for us to be available to advance in that line,” he said.
But his communist counterpart, Daniel Núñez, tacitly advanced for El Mostrador what will be the tenor of the discussion in the Senate Finance Committee: “There is a broad consensus that the highest sectors of Chile, the richest, avoid paying taxes through various tricks, such as putting their fortune and making operations of purchase and sale of assets in tax havens. It is necessary to put a shortcut to that and, also, tax the super-rich and apply a royalty (to mining). All of the above is key and will have the full support of the Communist Party,” he added.
The academic María Cecilia Cifuentes, on the other hand, asked that tax projects aim primarily at digital platforms. “Measures against circumvention and evasion are usually concentrated in high-income sectors, but this is a fairly widespread and growing problem… For example, we have the issue of digital platforms where there is a lot of informality, where we can also see businesses that compete unfairly with companies of formal goods and services, “he said.
“They are not vulnerable sectors, but they are middle sectors,” Cifuentes added.
A litmus test for entrepreneurs
One of the first to react to the presidential announcement to promote this new “tax pact” was the president of the Confederation of Production and Commerce (CPC), Juan Sutil, who expressed some disappointment: “I thought it would mean a period of deeper pre-legislative dialogue. And what’s being proposed is that this tax reform is going to Congress this month.”
Likewise, and without closing the door to new commitments in fiscal matters, Sutil asked the government for a little more dialogue, in order to “have a common diagnostic basis, to determine what the country can absorb, what the gaps are, and to advance in that,” he said.
Deputy Vlado Mirosevic, however, expressed confidence that the business community will understand the gravity of the situation. “I believe that there is a willingness, judging by what the business sectors have been saying after the social outbreak, in order that they understand the need for a new coexistence and that is done, yes or yes, with more social rights.”
“This is a classic discussion of political economy,” said Sol Foundation economist Marco Kremerman. “The problem is that we will most likely see a scenario of trenches, with an elite and economic groups that got used to winning everything, that got used to going for everything. In fact, it is difficult to see a system in the world where, after 25 years, the same is collected in relation to GDP, which is what happens in Chile,” he stressed.
A Threat to Rejection
But in politics, initiatives are not measured only in terms of merit and design, but also in terms of the opportunity in which they are presented. And in that sense, prominent analysts of the square agree that these tax adjustments that make up the reform package contribute to exposing two sectors that are mostly inclined to the option of Rejection: the right and the businessmen. The reason is simple, according to experts: both could be opposed to the changes that the country requires, which would deny their true will to transform some of those structures that affect the inequality expressed by the statistics and that have the country in a constituent process.
But things became even more entangled for the right and the businessmen, since, planned or not – even though the analysts consulted are clear in affirming that in politics nothing is so casual – the President himself announced that the bill to reform the pension system will be sent in August, less than a month before the exit plebiscite. In short, the analysts consulted believe that we will spend a good part of those days of campaigning talking about social security, a field in which pensions occupy a central place and in which both the right and the business community tend to get entangled.
“All this has a very strategic connotation,” said Rodrigo Espinoza, a doctor in Political Science from the Pontifical Catholic University of Chile and an academic at the Diego Portales University. “It is strategic, because it introduces the issue of tax reform in the middle of the campaign. And we all know that this government is committed to accompanying the constituent process and is firm with the option of Approval,” he said.
There is no doubt that this discussion will cloud the options of the Rejection and that the strategy of La Moneda aims to identify the right – which will be tempted to oppose these changes that are for the benefit of the citizens – with the option of the Rechazo. “Without a doubt,” responds the academic and political analyst Tomás Duval, linked to National Renewal. “The President sends a political signal that it is a biased tax reform, but in the middle of the campaign for the plebiscite he places the emphasis on social rights, and what better than the pension reform, a matter in which he must build majorities, considering that he does not have majorities in Congress,” he said.
Espinoza, meanwhile, said that it is expected that “congressmen, mayors and councilors will be deployed throughout the territory offering the complete package of public policies and a Constitution, and for us to assert the transition from a subsidiary State to a social State of law with the principle of fiscal responsibility. This strategy makes the world of Rejection uncomfortable, because they are going to be exposed as a sector that opposes changes.”
The good thing for the right and the world of Rejection is that, Duval recalled, the President himself took a problem out of them in terms of pension reform, since “he cleared the point of pension savings, giving assurances that he will not touch them”, although the discussion will be hard and intense in terms of other aspects at stake, such as future contributions and the degrees of solidarity that a pension system requires to function properly. And added Tomás Duval: “The big dispute is tax reform. There will be a very hard fight there for the amount of interests that are involved.”
But Marco Kremerman differs from that view: “There are business sectors that show a certain openness to contribute more, but we will see that they will surely propose instruments that are more prone to the process of accumulation,” said the economist of Fundación Sol, who issued a warning: “Chile is in an abnormal scenario. If Chile does not make changes to normalize its tax regime, it will not be able to get out of the swamp in which it finds itself, and we will go from social crisis to social crisis, and from political crisis to political crisis,” he said.

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