SANTIAGO President Michelle Bachelet on Monday announced a tax overhaul including higher corporate taxes, saying the changes would help Chile make progress in addressing inequality without hurting growth, despite worries about the impact on an already cooling investment climate.
Bachelet, a center-left politician who returned to the helm of the top copper exporter on March 11, has made raising taxes a key part of her election platform. She wants to use additional revenue to fund an overhaul of the education system and implement other social policies.
Some critics including former finance minister Felipe Larrain have warned that the tax overhaul could backfire.
They say that altering the tax structure may discourage investment, a risky move at a time when the Chilean economy is cooling and investment is already falling.
Chile's statistics institute said on Monday that factory output fell below forecasts last month.
The central bank is expected later on Monday to downgrade its growth forecast for 2014, which is currently 3.75-4.75 percent.
Chile's economy grew by 4.1 percent last year, the lowest rate since 2009.
"We are beginning one of the most important reforms of my government alongside education reform and a new constitution," Bachelet said in a ceremony on Monday to sign the bill, which will now go to Congress, where her ruling coalition has a majority.
"Tax reform is necessary and makes sense in the long term. It's not just about collecting more income but doing things ... that will permit us to advance in social solidarity. This reform is not going to brake growth."
Chile is expected to reach a per capita income that would effectively make it a developed country within the next decade, but its income inequality is the worst among the members of the Organisation for Economic Co-operation and Development (OECD).
Bachelet confirmed the main components of the bill, much of which had previously been flagged. Most elements will be phased in over four years. More details will be provided when the full bill is published on Tuesday, Finance Minister Alberto Arenas said.
Corporate taxes will be raised to 25 percent from 20 percent, and the 'FUT' (Taxable Profits Fund), a mechanism by which companies can gain tax exemptions on part of their profits, will be eliminated.
The bill will also end a foreign investment statute known as DL600, which provides investors from abroad with certain tax guarantees. Mining companies, among others, have raised concerns over its proposed abolition.
To soften the blow, the top personal tax rate will be reduced to 35 percent from 40 percent.
Some members of Bachelet's coalition, which ranges from moderate leftists to communists, do not agree with all aspects of the proposed tax changes and could delay the bill or water down its elements.
In its best case scenario, the government is hoping the bill will have passed the lower house by May 21, when Bachelet gives her State of the Union address, and be law by August.
(Reporting by Rosalba O'Brien, Antonio de la Jara, Alexandra Ulmer and Felipe Iturrieta; Writing by Rosalba O'Brien; Editing by Eric Walsh and Paul Simao)