OECD Tax Policy Reviews: Chile 2022

1. Introduction

Abstract

This chapter provides some background to the project in addition to the data and methodology used. It also describes the structure of the report.

Background and methodology

This objective of this research is to examine the level, composition and evolution of the tax burden in Chile. The Chilean Ministry of Finance appointed a tax commission in 2020 in part to evaluate the design of the tax system in Chile. As input to this work, the OECD was commissioned by the Ministry to undertake an independent analysis on the level, composition and evolution of the tax burden in Chile. The analysis includes an examination of tax shares and income levels in Chile, tax structure in Chile, tax convergence and a tax share path for Chile in the future.

The two main measures used in this research are the tax-to-GDP ratio and GDP per capita. This report uses two main measures. The first measure is the tax-to-GDP ratio, defined according to OECD Revenue Statistics. SSCs are classified as taxes1. The data is arranged by year and country. The second measure is income or GDP per capita. For the purposes of this report, GDP per capita is defined as GDP per capita in USD, measured in 2015 Purchasing Power Parities (PPP2). Given the focus on the tax-to-GDP ratio in this report, it is worth mentioning the concept of tax buoyancy whereby an increase in economic activity, measured by GDP, may in itself produce increases in tax revenue. For example, a tax buoyancy of one would imply that an increase in GDP of one percent would increase tax revenue by one percent, meaning that the tax-to-GDP ratio would remain unchanged. A tax buoyancy above one would mean that tax revenues would rise faster than GDP causing the tax-to-GDP ratio to rise. Empirical evidence based on OECD countries has found that in the short-run buoyancy is close to one for the majority of OECD countries and in the long-run buoyancy is not significantly different from one in about half of the OECD countries (Belinga et al., 2014[1]).

SSCs in Chile are private and therefore not considered to be taxes under the OECD definition. In Chile, mandatory contributions to pension or health funds are managed by the private sector. These funds are not classified as SSCs under the above OECD definition. Consequently, SSCs in Chile appear relatively lower based on the OECD definition than they would if mandatory contributions to the private sector were included. To enhance the comparison of the tax-to-GDP ratio in Chile and the OECD as part of this report, mandatory contributions to the private sector are included in SSCs (see Section 2.2 for further discussion). Furthermore, Chile’s social security benefits are not mainly financed through SSCs, as is common in the OECD, but rather through contributions to the private sector (see Section 3.2).

OECD data are the main data source used for analysis, particularly OECD revenue statistics data. This report draws primarily on tax-to-GDP ratio data for Chile and OECD countries between 1965 and 2019 based on OECD Revenue Statistics data (OECD, 2020[2]). Tax-to-GDP data for Colombia and Costa Rica, who recently joined the OECD in 2020, are not included in the analysis in this report. While 2019 represents the most up-to-date year of available data, it should be noted that tax revenues declined in Chile in 2019 partly due to social unrest. The report also uses revenue statistics data and analysis on the financing of social security benefits from the revenue statistics memorandum tables (OECD, 2020[2]). OECD global revenue statistics data are also used. GDP per capita data are also used for Chile and OECD countries in the OECD compendium of productivity statistics between 1970 and 2019.

Tax-to-GDP ratios evolve for a complex set of economic, demographic and social reasons and policy choices. The current study provides a range of statistical analysis on the development and possible future trajectory of the tax level and tax structure in Chile compared to OECD and other countries. However, the tax level in a country (measured by the tax-to-GDP ratio) and the tax structure (measured by tax categories as a share of total tax revenues) vary between and within countries over time for a complex set of historical, economic, demographic, social and political reasons (OECD, 2018[3]). Some of these reasons relate to policy choices on taxation and welfare. In recent decades, tax structures in OECD countries have changed, notably there has been a shift away from personal income taxes and non-VAT consumption taxes, toward higher SSCs. Furthermore, OECD research has found that that different taxes affect growth differently (OECD, 2010[4]) and this may have contributed to policy decisions on tax structure in some OECD countries.

GDP per capita in PPP is only one measure of economic growth. In the present research, economic growth is measured using GDP per capita in PPP. However, other measures could have been used (nominal GDP growth, GDP real growth, GDP PPP growth), which would in turn have implications for the measurement of convergence. Since 1980, Chile’s population growth (68% in total) has expanded at more than double the rate in the OECD (32%) (Chile’s population grew from 11.1 million in 1980 to 18.8 million in 2018)3. Consequently, compared to using GDP as a measure, GDP per capita growth will be lower in Chile due to its faster population growth (holding other factors constant).

A set of comparison countries are used in this research. For the purposes of the report, a number of comparison countries are used. First, the OECD average is used4. From a methodological perspective, the OECD average can be calculated based on a different number of countries in different years because new countries join the OECD over time. Furthermore, newer joiners have tended to be relatively less developed which also has implications for statistical averages. Second, the Latin American and Caribbean (LAC) country average is also used and similar methodological issues apply. Third, four comparison countries were chosen by Chile, namely, Australia, Canada, Ireland and New Zealand. Finally, a number of resource-rich countries are chosen, namely, Canada, Brazil, Norway and Mexico.

Different measures of tax convergence are measured empirically (Section 4). In the field of economics, convergence generally refers to economic convergence, which can be defined as low-income economies closing the gap with richer economies over time (measured using GDP per capita). Tax convergence is a similar concept which implies that lower tax-to-GDP ratio countries (such as Chile) catch-up with higher tax-to-GDP ratio countries over time. There are two commonly adopted approaches to measure tax convergence:

1. β tax convergence tells us whether low-tax countries catch-up (in terms of their tax-to-GDP ratio) with high-tax countries over time;

2. σ tax convergence occurs in a group of countries when there is a decline in the dispersion of the tax-to-GDP ratio over time.

Tax convergence can be measured empirically using correlational and econometric analysis.

Structure

The report contains four chapters focusing on different tax topics in Chile: tax revenues and income levels, tax structure, tax convergence and a tax-to-GDP ratio path for the future. Chapter 2 evaluates Chile’s tax-to-GDP ratio and GDP per capita compared to the OECD and comparison countries in recent decades. It also examines the relationship between tax-to-GDP and GDP per capita generally and the extent to which Chile has converged with the average of OECD countries over time. Chapter 3 compares the tax structure in Chile with the OECD average. The Chapter also considers the role of some relatively atypical features of the tax structure in Chile including Social Security Contributions and compulsory contributions to the private sector. Selected tax rates in Chile are also compared with the OECD average to add context to the tax structure discussion. Chapter 4 begins by considering the historical growth pattern of tax-to-GDP in OECD countries. The chapter then examines theoretical and empirical evidence for whether low tax-to-GDP countries catch-up with high tax-to-GDP countries over time (known as beta tax convergence) and whether Chile’s tax structure has become more similar to the OECD average over time (known as sigma tax convergence). Lastly, it measures Chile’s tax structure similarity to the OECD average and identifies the largest absolute tax differences, which provide a starting point for identifying areas of potential tax reform. Chapter 5 begins by comparing Chile’s tax-to-GDP ratio with countries when they had similar levels of economic development. It then projects a possible tax-to-GDP path for Chile over the coming decade if it were to follow the path of countries from when they had a similar level of economic development. The Chapter also highlights how some of the favourable demographics in Chile contributed to a low tax-to-GDP ratio are shifting.

Notes

← 1.  OECD revenue statistics classify social security contributions (SSCs) as tax revenues. SSCs are similar to but not the same as tax revenues. Like taxes, SSCs are compulsory. Unlike taxes, SSC benefits can depend on SSC contributions having been made.

← 2.  PPP are currency converters that control for differences in price levels between countries, making it possible to compare absolute values across countries.

← 3.  Based on OECD population projection statistics.

← 4.  A weighted average of the countries in the OECD in a given year.