This chapter 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.
OECD Tax Policy Reviews: Chile 2022
OECD Tax Policy Reviews
2. Tax revenues and income levels
Abstract
Chile’s GDP per capita remains relatively low, despite its relative convergence with the OECD average over the past 30 years
Some evidence supports that GDP per capita convergence occurs at 2% yearly. GDP per capita convergence, often described as the catch-up process, refers to the process by which less advanced economies with lower-income per capita converge towards more advanced economies through higher growth rates, as they capitalise on technology transfer, inward investment, and relatively lower labour costs. Some long-term empirical evidence supports a convergence hypothesis at a speed of 2% annually (Young, Higgins, Levy, 2004), although counter evidence also exists (see Monfort, 2008).
Chile’s GDP per capita has grown at a 2.7% annually since 1995, faster than OECD average rate. Chile’s GDP per capita was USD 12 253 (in 2015 PPP) in 1995 and USD 23,151 in 2019, which represents a compound annual growth rate (CAGR) of 2.7% over the period (see Figure 2.1). Over the same period, the OECD average GDP per capita was USD 29 921 in 1995 and USD 42 953 in 2019, which represents a CAGR of 1.5%. As a result, Chile’s GDP per capita converged with the OECD average over the period – GDP per capita in Chile represented 41% of the OECD average in 1995 but 54% in 2019. GDP per capita in Chile grew faster than the OECD average over the period, albeit the rate of growth was somewhat slower after 2007. Since 2007, Chile’s GDP per capita has grown by a CAGR of 1.7% compared to 0.9% in the OECD. Over the full period 1995 to 2019, Chile has experienced relative convergence with the OECD average, albeit it has not experienced absolute convergence (i.e. the absolute income gap between Chile and the OECD has not decreased during the period). For a discussion of relative and absolute convergence, see (Kant, 2019[5]).
Figure 2.1. Chile’s GDP per capita has grown faster than the OECD average
Source: OECD (2019), OECD Compendium of Productivity Indicators 2019, OECD Publishing, Paris, https://doi.org/10.1787/b2774f97-en.
Chile’s tax-to-GDP remains among the lowest in the OECD, despite its convergence with the OECD over recent years
Chile’s current tax-to-GDP ratio is among the lowest found in OECD countries and it has been consistently lower than the OECD average over the past 30 years. In 2019, the latest year for which data are available, Chile’s tax-to-GDP ratio is 20.7% compared to 33.8% in the OECD. Since 1995, Chile’s tax-to-GDP ratio has been consistently below the OECD average, as shown in Figure 2.2.
Chile’s tax-to-GDP ratio had been converging with the OECD average up to its peak in 2007, but it has been diverging since then. As shown in Figure 2.2, the tax-to-GDP ratio in Chile increased from 18.3% in 1995 to 20.7% in 2019, an increase of 2.4 percentage points. Over the same period, the tax-to-GDP ratio in OECD countries increased from 32.5% in 1995 to 33.8% in 2019, an increase of 1.3 percentage points. As a result of Chile’s faster tax-to-GDP growth rate over the period, Chile’s tax-to-GDP ratio as a share of the OECD tax-to-GDP ratio has caught up or converged with the OECD, increasing from 56% in 1995 to 61% in 2019. However, a reversal in the pattern of the tax-to-GDP ratio emerges when the time period is split in to two equal length periods (of 12 years). In the first period from 1995 to 2007, Chile’s tax-to-GDP ratio converged with the OECD average – it grew by 4.4 percentage points in total compared to 0.7 percentage points in the OECD. In the second period from 2007 to 2019, Chile’s tax-to-GDP ratio diverged with the OECD average, it declined by 2.1 percentage points while the OECD average continued to grow at 0.7percentage points (the same rate as the previous period). Overall, Chile’s tax-to-GDP ratio rose and grew faster than the OECD average between 1995 and 2007 (causing convergence) but has declined and grown relatively slower than the OECD average since then (causing divergence).
The relatively high volatility of Chile’s tax-to-GDP ratio and its divergence from the OECD average after 2007 was partly driven by fluctuations in tax revenues from copper mining. The tax-to-GDP ratio in Chile has also been more volatile than the OECD average, partly due to tax revenues from resources such as mining. For example, the increase in the tax-to-GDP ratio in the mid-2000s was partly driven by copper revenues, which rose dramatically from 1.0% in 2003 to 8.1% in 2007 (OECD, 2018[6]). If tax revenues from copper were excluded, the tax-to-GDP ratio would have been closer to 17.3% in 2007, rather than 22.7%1. Therefore, much of the rapid tax-to-GDP ratio convergence in Chile with the OECD average up to 2007 can be attributed to tax revenues from copper mining.
Figure 2.2. Chile’s tax-to-GDP ratio had been converging with the OECD average up to its peak in 2007, but it has been diverging since then
Note: The grey shaded area shows the maximum and minimum tax-to-GDP ratios in OECD countries in each year. OECD average SSC data for 2019 are not available so 2018 data is used.
Source: OECD (2020), Revenue Statistics 2020, OECD Publishing, Paris, https://doi.org/10.1787/8625f8e5-en
Chile’s tax-to-GDP ratio has been growing at about 1 percentage point a decade. Between 1995 and 2019, and on an average annual basis, the tax-to-GDP ratio increased in Chile and the OECD by 0.10 and 0.05 percentage points, respectively. By extension then, over ten years the tax-to-GDP ratio grew by roughly 1 percentage point compared to 0.54 percentage points in the OECD.
When SSCs are excluded from tax revenues, the tax-to-GDP gap between Chile and OECD is narrowed due to the relatively small role played by SSCs in Chile. The OECD classifies SSCs as tax revenues2, which play a large role in most OECD countries but a much smaller role in Chile. In 2019, SSCs as a share of GDP were 1.5% in Chile, compared to 9.0% in the OECD. Relative to the size of the economy then, SSC revenues are about six times greater in the OECD average than in Chile. This large difference in the importance of SSC revenues has implications for the tax-to-GDP gap between Chile and the OECD average. Figure 2.1 shows that when SSCs are excluded from tax revenues, Chile’s tax-to-GDP ratio is much more similar to the OECD average. In 2019 for example, when SSCs are included in tax revenues the tax-to-GDP gap between Chile and the OECD is 13.2 percentage points compared to just 5.3 percentage points when SSCs are excluded3. Furthermore, when SSCs are excluded, the tax-to-GDP ratio has also been converging more quickly with the OECD average over time. When SSCs are excluded, the gap between Chile and the OECD was 8.6 percentage points in 1990 and 5.3 in 2019 compared to 14.2 in 1990 and 13.2 when SSCs are included. However, it has to be pointed out that excluding SSCs from the tax-to-GDP ratio represents an unorthodox analytical approach, which may not be very informative and could even be misleading. This is particularly the case because SSCs play a significant and growing role in the tax revenues of many OECD countries and have been growing as a share of tax revenues in OECD countries in recent decades. Indeed, from the taxpayer’s perspective, it may be more insightful to measure the total mandatory burden, including all taxes (including SSC) and compulsory contributions to the private sector. The extent of convergence between Chile and the OECD when compulsory payments to the private sector are included is provided later in the report in Section 3.3.
Despite Chile’s faster growth relative to the Latin American and Caribbean countries average, Chile’s tax-to-GDP ratio grew more slowly. Figure 2.1 shows the tax-to-GDP ratio and GDP per capita in Chile and Latin American and Caribbean (LAC) countries between 1990 and 2018. According to the analysis, Chile’s income has increased faster than the Latin American and Caribbean (LAC) countries on average, but its tax-to-GDP ratio has grown more slowly.
Table 2.1. Chile’s tax-to-GDP ratio grew more slowly than the LAC average since 1990
Changes in tax-to-GDP ratio and GDP per capita in Chile and Latin American and Caribbean, 1990 - 2018
Note: GDP per capita, in USD, in PPP. PP refers to percentage points. LAC average represents the group of 25 Latin American and Caribbean countries in the OECD Revenue Statistics in Latin America and the Caribbean publication and excludes Venezuela due to data availability issues.
Source: OECD (2020), Revenue Statistics 2020, OECD Publishing, Paris, https://doi.org/10.1787/8625f8e5-en and World Bank development indicators database.
Tax-to-GDP ratios are weakly positively correlated with income levels, but there is significant heterogeneity across countries and outliers drive the relationship
Chile’s current tax-to-GDP ratio is not just low relative to most OECD countries today but it is low relative to most OECD countries in any given year over the past half century. In the previous section, it was established that Chile’s GDP per capita and tax-to-GDP ratio grew faster than the OECD average in recent decades. This finding is also confirmed in Figure 2.3, where the tax-to-GDP ratio is highlighted for Chile in 1990 and 2019 and in the OECD in 1965 and 2019. Chile’s 2019 tax-to-GDP ratio of 20.7% is relatively low compared not just to OECD countries in 2019 but also to OECD countries in any year over the past half century. Chile’s overall tax-to-GDP ratio and income is not so different from the OECD’s in 1965 (however, its tax structure is different, as we see in the next section). The tax-to-GDP ratio does not include compulsory payments to private sector funds, which are explored later in the report (see Section 3.3).
Few countries have reached a high level of economic prosperity with a low-tax-to-GDP ratio. Countries that have had economic prosperity have also tended to have high tax-to-GDP ratios. Countries that have had economic prosperity with a low tax-to-GDP are among the minority. One example is Ireland, shown in bottom right of the chart.
Tax-to-GDP ratios have had a historical upper bound of about 50% of GDP. Over more than half a century of data, the tax-to-GDP ratio has never risen above 50% (the maximum tax-to-GDP for any OECD country in any year was 48.9%).
Tax-to-GDP ratios are positively correlated with GDP per capita, but there is significant heterogeneity. Figure 2.3 shows the relationship between tax-to-GDP and GDP per capita in OECD countries in all years between 1965 and 2019. The data shows a weakly positive relationship between tax-to-GDP ratio and GDP per capita, with a few outlying countries driving the relationship.
Figure 2.3. Tax-to-GDP ratios are positively correlated with income, but there is significant heterogeneity
Note: Only OECD countries where data are available for all years 1965 to 2019 are shown.
Source: OECD (2020), Revenue Statistics 2020, OECD Publishing, Paris, https://doi.org/10.1787/8625f8e5-en and OECD Compendium of Productivity Indicators 2019, OECD Publishing, Paris, https://doi.org/10.1787/b2774f97-en
However, group averages mask heterogeneity and a range of tax-to-GDP ratios paths are possible within individual countries. An abundance of natural resources, but not a dependence on them, can be positive for growth, and can be positive for tax revenues, if receipts are invested rather than consumed (OECD, 2006[7]). Figure 2.4 compares Chile to selected resource-rich and comparison countries (defined in Chapter 1) between 1990 and 2018. Resource-rich oil countries have a wide range of tax-to-GDP ratios – in 2018, from Norway (39.6% of GDP) to Brazil (33.1%) to Mexico (16.1%). The selected comparison countries have a narrower range – in 2018, from Canada (32.9%) to Ireland (22.3%). Chile’s tax-to-GDP ratio is the lowest compared to the comparison countries and the lowest compared to the resource-rich countries, with the exception of Mexico. Figure 2.4 also highlights how tax-to-GDP ratios follow a wide range of different paths over time and can rise or fall for sustained periods of time reflecting economic conditions in the country.
Figure 2.4. Chile’s tax-to-GDP ratio is relatively low compared to selected comparison and resource-rich countries
Note: Comparison countries are Australia, Canada, Ireland and New Zealand. Resource-rich countries are Norway, Mexico and Brazil. Canada is not included as a resource-rich country as it is already used as a comparison country.
Source: OECD (2020), Revenue Statistics 2020, OECD Publishing, Paris, https://doi.org/10.1787/8625f8e5-en.
Notes
← 1. According to the analysis in the cited in the above OECD Economic Survey of Chile 2018, the tax-to-GDP ratio rose from 20.2% in 2003 to 25.5% in 2007. When copper revenues are excluded over this period, the tax-to-GDP ratio fell from 19.2% to 17.3%.
← 2. Under OECD Revenue Statistics, SSCs paid to the general government are classified 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.
← 3. The tax-to-GDP ratio in Chile is 20.7% in 2019 when SSCs are included and 19.6% when they are not. The tax-to-GDP ratio in the OECD is 33.9% in 2018 when SSCs are included and 24.9% when they are not. 2018 data are used for the OECD average because later data are not available for SSCs.