Column by José Miguel Sánchez: Tax Proposal.

The National Reconstruction and Economic and Social Development Bill presented by the government contains a series of measures aimed at reactivating the economy, investment, and growth. Several of these measures are related to taxation. It is therefore worth reviewing some of the criteria used in public finance to evaluate a tax system. The first is economic efficiency. Except in the case of corrective taxes designed to address negative externalities, taxes generate a social cost because they distort the allocation of resources. A classic result of tax theory (Ramsey) states that the way to minimize the efficiency cost in order to achieve a certain level of revenue is to tax goods whose supply or demand are more inelastic, that is, less sensitive to price. A second criterion is tax equity or fairness, both horizontally and vertically. Horizontal equity implies that an additional unit of income should be taxed equally, regardless of whether it comes from labor or capital. Vertical equity, on the other hand, refers to the progressivity of the system: those with higher incomes should pay more taxes. There are also other criteria, such as administrative simplicity or revenue collection capacity, but efficiency and equity are usually the main ones. With these principles, it is possible to make a preliminary analysis of some of the measures contained in the bill. Two examples illustrate the discussion well. The first is the exemption from contributions for the first home of people over 65 who live in it. The justification is reasonable: the value of properties can increase for reasons of the real estate market, affecting retired people who often do not have the necessary income to pay this tax. However, from the perspective of the criteria mentioned above, the property tax is a good tax, since the supply of housing is relatively inelastic and, therefore, generates few economic distortions. In addition, it taxes properties of higher value—most homes are exempt—so it also reasonably meets equity criteria. The liquidity problem could be addressed in another way, for example, by allowing payment to be deferred until the sale or inheritance of the property. The second case is the reintegration of the corporate tax with personal income taxes. Integration recognizes that the people who ultimately pay taxes are the owners of the companies, not the companies themselves. Corporate tax acts, therefore, as an advance payment of the complementary tax that the owners must pay on the profits withdrawn, according to the current progressive tax table, which does not change in the bill. Currently, Chile operates with a semi-integrated system, where only 65% of the tax paid by companies can be used as a credit against personal income taxes. From the perspective of equity, integration corrects a problem of double taxation of capital income: first at the company level and then at the personal level when profits are withdrawn. In addition, it reduces the bias that unintegrated systems create in favor of debt financing rather than equity financing. In any case, this is a broad and complex bill, with measures of very different nature. A comprehensive analysis requires more extensive work than the limits of this column allow. However, these examples show how the principles of efficiency and equity can help to adequately evaluate the tax proposals under discussion.