This chapter 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. However, the COVID-19 pandemic will make a rising tax-to-GDP ratio in the future in Chile much more challenging. Once the recovery is firmly in place, there is scope for Chile to re-examine its low tax level and rebalance its tax structure. The chapter also briefly highlights how some of the favourable demographics in Chile which helped to facilitate a low tax-to-GDP ratio are changing.
OECD Tax Policy Reviews: Chile 2022
OECD Tax Policy Reviews
5. A tax-to-GDP ratio path for the future
Abstract
Chile’s tax-to-GDP is low when compared with countries when they were at a similar level of economic development to Chile
Chile’s tax-to-GDP ratio is similar to Australia when Australia had a similar level of GDP per capita to Chile’s current level. In 20191, Chile had GDP per capita of USD 23 151 and a tax-to-GDP ratio of 20.7% in 2019. Table 5.1 shows that Australia, Canada, Ireland and New Zealand had the same GDP per capita as Chile’s 2019 level in 1973, 1972, 1989 and 1975 respectively. Therefore, when Australia, Canada, Ireland and New Zealand had a similar level of economic development to Chile’s2, they had tax-to-GDP ratios of 22.5%, 29.9%, 32.5% and 30.0%. Chile’s tax-to-GDP ratio is similar to Australia when Australia had a similar level of economic development. When the OECD average GDP per capita was similar to Chile’s in 1978, the OECD average tax-to-GDP ratio was 31.1%.
Table 5.1. Chile’s tax-to-GDP ratio is somewhat similar to Australia when Australia had a similar level of GDP per capita
Tax-to-GDP ratios of selected OECD countries, in the year in which they had the closest GDP per capita closest to Chile’s in 2019 (Chile’s tax-to-GDP ratio in 2019 = 20.7%)
Note: *Relates to 30 selected OECD countries for which data are available.
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
Chile’s tax-to-GDP ratio is low compared with OECD countries generally when they had similar GDP per capita to Chile’s current level. Figure 5.1 shows the tax-to-GDP ratio for all OECD countries in the year in which they had the closest GDP per capita to Chile’s 2019 GDP per capita level. The year in question for each country is shown in brackets in the graph. The analysis confirms that Chile’s tax-to-GDP ratio is very low when compared with OECD countries when they had a similar level of economic development to Chile. Figure 5.1 also shows OECD countries when they had similar levels of economic development to Chile and SSCs are excluded from the tax-to-GDP ratio. On this basis, the tax-to-GDP ratio average across the OECD countries shown is 22.7% and ranges from 13.7% to 30.3%. This suggests that when SSCs are excluded Chile’s tax-to-GDP ratio is only modestly below OECD countries when they had similar levels of economic development to Chile.
Figure 5.1. Chile’s tax-to-GDP ratio is low compared with OECD countries when they had similar GDP per capita to Chile’s current level
Note: The figure includes 28 OECD countries which had a similar GDP per capita (in PPP) to Chile’s 2019 GDP per capita and which had tax-to-GDP data that was available in that year. t refers to the year in which the country had the closest GDP per capita to Chile’s GDP per capita of USD 23,151 in 2019. t + 10 refers to the countries tax-to-GDP ratio ten years later. Poland and Lithuania do not have data ten years later so data 9 years later is used. Turkey does not have data ten years later (since the year in which had the same GDP per capita as Chile is 2013).
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
A decade after OECD countries had similar incomes to Chile, the tax-to-GDP ratio had risen by three percentage points
Ten years after OECD countries had a similar level of economic development to Chile, the tax-to-GDP ratio had increased by three percentage points. Tax-to-GDP ratios have tended to rise in OECD countries on average over time from when they had similar levels of economic development to that in Chile currently. However, there is significant variation by country; individual country tax-to-GDP ratios can go up or down and for sustained periods. Ten years after OECD countries had similar economic development levels to Chile, tax-to-GDP rose by about 3pp on average. In Australia, it grew by 3.6pp but declined by 1.6pp in Ireland. According to the analysis, ten years after the year that Australia, Canada, Ireland and New Zealand had a similar level of economic development to Chile’s current level, their tax-to-GDP ratios had changed to 26.1% (+3.6 percentage points), 32.3% (+2.4 percentage points), 30.9% (-1.6 percentage points) and 31.2% (+1.2 percentage points) respectively. Ten years after the OECD average had a similar level of economic development to Chile’s current level, the OECD average tax-to-GDP ratio increased to 34.3%, which represents a change of 3.1 percentage points or 0.31 percentage points annually. Twenty years later, the OECD average tax-to-GDP ratio continued to increase, albeit more slowly to 36.7%, which represents an increase of 2.4 percentage points or 0.24 percentage points annually. The average tax-to-GDP growth for the four comparison countries is 1.4 percentage points over ten years or 0.14 percentage points a year.
Tax-to-GDP ratios tend to rise over time on average from lower levels of economic development, but they can also fluctuate up and down in individual countries for sustained periods. Figure 5.2 extends the analysis in Figure 5.1 to show yearly developments in the tax-to-GDP ratio in the OECD starting from the year in which they had the closest GDP per capita to Chile’s 2019 level. The grey shaded area shows the range of the maximum and minimum tax-to-GDP level in a given country in each year. The analysis shows that, over a long-term 30 year time horizon, and for a group of advanced OECD countries, the average tax-to-GDP ratio has tended to rise from the time it had a level of economic development similar to Chile’s level. After 10, 20 and 30 years, it had changed from 31.1% to 34.3% to 36.7% to 36.7% respectively. Note that in the last ten year period, the average tax-to-GDP ratio remained at the same level. However, the analysis also demonstrates that the tax-to-GDP level in individual countries can fluctuate downwards as well upwards and for sustained periods of time.
Figure 5.2. Tax-to-GDP ratios in individual countries can fluctuate down as well up and for sustained periods
Note: The average refers to 28 OECD countries which had a similar GDP per capita in PPP to Chile’s 2019 GDP per capita and which had tax-to-GDP data that was available in that year.
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
While Chile’s tax-to-GDP ratio path may have been set to rise, the COVID-19 pandemic and subsequent economic conditions have raised new challenges
There are many challenges to forecasting tax-to-GDP ratios, not least given the current environment. Forecasting tax-to-GDP ratios is uncertain and challenging and this is particularly true in the context of the impact of the COVID-19 pandemic and the prevailing economic conditions in the subsequent period. Beyond the immediate impact of COVID-19 and a strong bounce-back, the global economy is now facing elevated levels of inflation, tighter financial conditions and the impacts of the general withdrawal of extraordinary fiscal measures following the COVID-19 pandemic. There are many available methods to forecasting with differing advantages and limitations including using macroeconomic projections and historical statistical extrapolations. Under the latter approach, the future tax-to-GDP ratio path can be based on average long-term historical data. This approach comes with caveats including that it does not take into account current economic conditions and it assumes long-term historical trends will be representative of the future. Historical statistical extrapolations also do not take into account the role of tax buoyancy - whether GDP increases may cause higher tax revenues (for a discussion, see Section 1). Notwithstanding these caveats, Figure 5.3 provides an indication of possible paths based a historical statistical extrapolation using data for the year 2019 before the COVID-19 pandemic.
If Chile followed a similar path to the OECD average from when it had a similar level of economic development to Chile, Chile’s tax-to-GDP could rise by 2029, but the COVID-19 pandemic has made this outcome more challenging. Notwithstanding these caveats, Figure 5.3 applies the tax-to-GDP trajectories in OECD countries from when they had similar GDP per capita to Chile in order to project a range of potential tax-to-GDP ratio outcomes for Chile over the next decade. If Chile were to follow a similar path to the average of OECD countries (when they had a similar level of economic development to Chile’s current level), Chile’s tax-to-GDP ratio in 2029 could reach 22.9%. However, a wide range of outcomes are possible ranging from 19.7% to 23.6% (shown in the shaded area) based on the historical trajectories of OECD countries as demonstrated by the fastest and slowest tax-to-GDP growth countries over the subsequent 10 year period. Importantly, the COVID-19 pandemic will make reaching the tax-to-GDP ratios presented in Chile much more uncertain.
Figure 5.3. If Chile’s tax-to-GDP ratio were to follow various historical average trends, the tax-to-GDP ratio could rise by 2029
Note: (1) OECD average growth rate when economically similar to Chile relates to a set of 27 countries for which GDP per capita data can be matched and where tax-to-GDP data are available (ISR, ISL and TUR are not included). Fastest and slowest tax-to-GDP growth countries are selected after 10 years from the year in which GDP per capita was the same as Chile’s 2019 GDP per capita. The OECD average growth from when countries were economically similar to Chile predicts a tax-to-GDP ratio of 23.6% in 2029 (2) OECD average growth is based on the average annual growth rate of OECD countries in the past five decades (from 1965 to 2015). (3) The LAC average growth rate is based on the average annual growth rate of LAC countries in the past three decades (from 1995 to 2018). (4) ARIMA modelling is based on Chile’s historical tax-to-GDP path over 3 decades (between 1990 and 2019). The ARIMA modelling predicts a tax-to-GDP ratio of 19.7% in 2029.
Source: OECD (2020), Revenue Statistics 2020, OECD Publishing, Paris, https://doi.org/10.1787/8625f8e5-en