On 29 December 2015 the IMF published a Working Paper entitled Long-term Gain, Short-Term Pain: Assessing the Potential Impact of Structural Reforms in Chile. IMF Working Papers are published for the purpose of encouraging comments and do not necessarily represent the views of the IMF.

The paper notes that a fundamental tax reform was completed in September 2014. The changes included a gradual increase in corporate tax rates; and a choice for firms between an integrated tax system and a new semi-integrated regime. The integrated tax regime is less generous than the previous regime mainly because dividends are taxed when accrued, whether or not they are distributed. Under the semi-integrated regime dividends are taxed only when they are distributed but they are taxed at a higher rate and the shareholder can deduct only part of the dividend from the final tax.

The study considers that under both the new tax regimes the marginal tax rates on capital will increase. Although the government is prudent in increasing its tax revenue to match higher spending the effect of higher taxes on income from capital may be a reduction of corporate savings and investment. The preliminary estimates from the Chilean Internal Revenue Service project that under the new tax regime the effective marginal tax rate on income from capital would increase by 3 percentage points by 2018.

The IMF Working Paper considers that as higher capital taxation reduces the return on capital firms will tend to invest less and private consumption will be reduced as household income falls. The 2014 tax reform also increased taxes on consumption by extending the value added tax (VAT) base and increasing excise tax on some non-primary goods such as tobacco and alcohol.

The paper therefore concludes that the tax reform negatively affects investment and consumption decisions in the short and the long term. With regard to the general impact of the structural reforms the Working Paper suggests that the impact depends on the credibility, effectiveness and speed of implementation of the reforms. The negative impact on GDP from the higher taxation on income from capital should be minor and should soon be offset by the positive effect of the structural reforms on productivity.