Wealth taxes destroy business confidence—create mass uncertainty

March is coming and the tax debate will once again be at the forefront of the legislative discussion. On the 7th and 8th of next month, the Chamber of Deputies will have to vote on the tax reform bill, and then continue the discussion in the Senate Finance Committee, in its second legislative procedure. One of the issues that generates the most criticism from the opposition and the business sector is the tax on high net worth individuals, as they consider that it will affect investment and savings by taxing the stock of resources. In view of this, the Minister of Finance, Mario Marcel, said that "if the opposition thinks that this tax has a series of problems, then it should put forward an alternative proposal, but one that maintains the objectives of collection and progressiveness", as he said in an interview with Pulso at the end of January. And although the opposition has not yet come up with a proposal to replace this tax, some options have begun to emerge from the business community, which will be presented when invited to the Senate Finance Committee. And it was precisely the president of the Confederation of Production and Commerce (CPC), Ricardo Mewes, who stated that one of the alternatives that the sector is considering presenting is to replace the wealth tax with a one-point increase in the tax paid by large companies. Although he said that this proposal has already been outlined to Minister Marcel, the calculations of how much would be collected in this way are still missing, in order to present it formally to the Treasury. For the business community, the main thing is to modify this wealth tax, because it affects the stock and this in turn has implications for investment and savings, they say. Therefore, the alternative formulas will be focused on mechanisms that tax flows, such as the corporate tax. Currently, the first category tax paid by large companies in the semi-integrated system is 27%. The owners or partners are entitled to a 65% credit, i.e., they can deduct 65% of the 27% paid by the company from their personal income tax. This tax is already considered high by several experts when compared to the average of the OECD (Organization for Economic Cooperation and Development) countries, which is 23.7%. Less bad For the same reason, the CPC's proposal immediately opened a debate among tax experts and economists, who, although they do not fully agree that this is the solution, see it as a "lesser evil" compared to what would be the application of the wealth tax. Although the experts admit that a one-point increase in the corporate tax would raise between US$350 million and US$450 million per year, which is equivalent to between 0.12% and 0.16% of the Gross Domestic Product (GDP), and would therefore be less than what the government expects to raise with the wealth tax -0.48% of the GDP, some US$1,500 million-, they affirm that these resources would be "more feasible to raise". This, considering that the logistics are already in place compared to the other tax, which is more complex to control. In addition, they argue that the Treasury's calculations in this respect are somewhat overestimated. Patricio Rojas, an economist at Rojas y Asociados, indicates that the CPC's approach is in the context that the wealth tax is very negative. "It does not mean that it is the best option, but it is the lesser evil," he says. For the economist, although the government is projecting to raise US$1.5 billion with its formula, that figure is highly questionable. "There is no certainty that it will collect what it is proposing. The vast majority of these taxes in the countries where they have been applied have been lower," he says. On the other hand, he says that one more point in the corporate tax "we know that it raises US$400 to 450 million". Sergio Lehmann, chief economist at Bci, indicates that "the corporate tax may be a better alternative, but it also implies a high cost. Its current level exceeds the average of the OECD countries and could therefore be a disincentive for new investments, by affecting the relative competitiveness of our economy. It would therefore have an effect on the long-term growth capacity of the economy". He points out that "an important problem with the wealth tax is the control and valuation of assets. For the same reason, in addition to the distortions caused, it effectively entails uncertainty in tax collection. This is not the case with the corporate tax, for which there are greater certainties based on strict accounting rules". Lehmann argues that "there is no doubt that the wealth tax introduces strong distortions, generating incentives for capital outflows and the establishment of residence abroad in the case of the most affected individuals". In this sense, he adds that "international evidence is conclusive in showing bad experiences in this matter, recognizing a low collection and frictions that impact the capital market and, therefore, the economic development. In several countries, for this very reason, after recognizing the negative effects of this type of taxes, they have been eliminated after applying them temporarily". The tax experts Javier Jaque, partner of Consultoría Tributaria CCL AC Auditores Consultores, states that "the wealth tax has been shown not to be efficient in different parts of the world. And therefore, versus the income tax which, although it is not optimal, is something more accepted by the industry, it is more feasible to collect through the corporate tax than through the wealth tax". Ignacio Gepp, partner at Puente Sur, agrees with his peers, as he also sees it as a lesser evil: "In terms of the impact on investment, the lesser evil is a corporate tax. In this sense, the analysis made by the CPC is correct, because between these two taxes, the one point increase in the corporate tax will generate a lower impact on investment, compared to the one applied to wealth". Among those who believe that this solution is bad and do not validate it is the partner Leader Tax & Legal of Deloitte, Hugo Hurtado. "The corporate tax is high and therefore, there is not much more room. The solution does not go that way and it also has an impact on investment", he accuses. In addition to this opinion, Sebastián Guerrero, partner of Guerrero Garcés, categorically rejects it: "I think it is a bad idea. Faced with a terrible instrument such as the wealth tax, the answer cannot be to increase even more the first category tax, which is already among the highest in the OECD. Today we need to encourage investment and this points in the opposite direction". The wealth tax proposed by the government aims at taxing residents or domiciled in Chile with a tax on the part of the wealth that exceeds 6,000 UTA (US$4.9 million). This regulation also contains guidelines that allow taxpayers to determine the economic value of their assets, understanding as economic value that which was determined by independent third parties. The rate applied varies according to the amount of assets: up to 6,000 UTA, US$4.9 million, is exempt, between 6,000 to 18,000 UTA (US$4.9 - US$14.7 million) will have a rate of 1% and those who have assets over 18,000 UTA, that is more than US$14.7 million, will have a rate of 1.8%. In the discussion, the exit tax was eliminated for those taxpayers who lose their domicile, but the obligation to inform in order to be excluded from the tax is maintained. Also, the wording was clarified to establish simpler rules, without losing the correct determination of net worth. And a limit to the tax burden of 50% of the income considering the effective rates of income tax and wealth tax was proposed. According to government estimates, 6,383 taxpayers will be subject to the wealth tax, and a collection of 0.48% of GDP is expected.