To Reignite Economic Growth, Chile Requires a Productive Strategy Over Tax Cuts

Original article: Para volver a crecer Chile necesita una estrategia productiva, no una rebaja tributaria

By Ignacio Silva Neira, Executive Director of the Economic Policy Observatory

The National Reconstruction and Economic and Social Development Bill presented by the government is undoubtedly one of the most ambitious economic initiatives in recent years. This proposal not only addresses a wide range of issues but also aims to profoundly transform the country’s fiscal, tax, and regulatory structure.

This ideological urgency behind the transformation faces numerous challenges, particularly in the form of absences: a lack of consensus, insufficient rigor, and a risky gamble that seeks growth without substantial evidence supporting its efficacy.

The rationale behind reducing taxes for large corporations is that it will enhance profit margins, leading to increased investment and growth.

Part of the justification rests on a somewhat selective comparison with the OECD: Chile is one of the few economies in this group that has raised taxes, with a corporate tax rate of 27%, higher than the group’s average of 24%.

Many data points have been reiterated to complete the narrative; to mention just two: in comparisons of corporate tax rates with OECD countries that have integrated tax systems, Chile’s rate is above the average, which stands at 29% for the OECD.

Moreover, Chile has a larger corporate tax framework compared to the OECD. When adjusting for this factor, the corporate tax burden as a percentage of GDP is 6.4% in the OECD, while in Chile, it reaches 4.5%. To reform the corporate tax system, it is essential to engage in a rigorous debate—something the government has yet to respond to adequately.

On another note, a fundamental question arises for the medium term: Can we truly expect to revitalize growth solely by lowering corporate taxes?

The proposal treats this as an almost automatic outcome, while in reality, it represents an uncertain hypothesis, lacking several critical elements: What role do companies’ technical competencies play in fostering growth and investment? Consequently, what impact do exports have on growth in an economy like Chile’s?

Companies do not invest merely because they pay lower taxes. A business invests because it sees potential demand that it hopes will lead to increased sales—when profitable opportunities exist, along with adequate financing, productive capabilities, technology, and current or future demand.

A foreign company might find a country more attractive if its tax rate is 3% lower than elsewhere, but it won’t set up electric car production if there aren’t enough engineers to work in the factories. If those conditions are lacking, a tax cut may enhance their current profits without necessarily leading to future productive investments.

In contexts of high corporate concentration and financialization, those increased profits may end up allocated to dividend distributions, stock buybacks, debt reduction, or financial accumulation, rather than expanding productive capacity or generating quality jobs.

International evidence also does not support the notion that corporate tax reductions automatically lead to growth. In the United States, the 2017 tax reform reduced the federal corporate tax rate from 35% to 21% with promises of boosting investment, productivity, and wages. However, years later, there is no clear evidence of a structural change in productivity trends, while a significant portion of corporate profits was funneled into stock buybacks.

In fact, evidence shows that only 2% of the reduced revenue from tax cuts was compensated by an increase in investment.

Ireland is often cited as a successful case of low corporate taxation. However, the interpretation here must be cautious. Its low tax rate attracted multinational corporations and significantly boosted GDP, but much of this increase stemmed from the accounting and legal localization of profits by large international firms, as well as serving as a center for tax evasion and avoidance. Therefore, the growth may not have translated into local economic impact or personal income.

The problem, then, runs deeper and overlooks a central question: What does Chile produce, and what should it produce to achieve sustainable growth?

Additionally, the role of Chile in the world is absent from the conversation, highlighting the urgent need to consider how export sectors can play a central role in sustaining growth dynamics, particularly for an open and small economy.

The current trade insertion partly explains the ongoing stagnation: its low dynamism is also due to a productive structure concentrated in natural resources, low export diversification, limited technological integration, and stagnating productivity in key sectors.

The decline in growth rates did not begin simply because corporate taxes increased; it coincided with the end of the copper supercycle, stagnation in mining productivity, and an export matrix that failed to advance adequately toward higher value-added goods and services.

A serious growth strategy should inquire how to diversify the export basket, how to generate productive capacities, promote sectors with economies of scale, technological learning, and higher wages, and how to integrate Chile into more sophisticated value chains. This strategy must view companies as complex and heterogeneous entities, where their investment and production depend on the technological capabilities they accumulate over time, thus explaining their competitiveness.

No country has managed to develop sustainably solely through horizontal tax reductions. Successful development experiences have combined investment, public coordination, state capacities, industrial policy, innovation, and strategic orientation toward sectors with greater potential.

The government is banking on future fiscal consolidation on a promise of growth that is highly uncertain. If this promise fails to materialize, the cost will not fall on those who received the tax benefit, but rather on the public—with reduced fiscal flexibility, fewer resources available for social policies, increased pressure on public spending, or greater indebtedness.

A responsible economic policy cannot rely on the hope that lower taxes will singularly resolve an ongoing productive problem accumulated over decades. Achieving growth demands much more than alleviating the tax burden on capital; it necessitates a comprehensive development strategy.

Ignacio Silva Neira