Chile mainly taxes consumption. In fact, indirect taxes collect about 75% of total revenue, and the income tax, which collects the remaining 25%, incorporates schemes that allow taxpayers to substract from their tax duties part of the flow of savings, approximating it to the consumption tax. Now, even the consumption tax distorts the work-leisure decision. Hence, the high maximum rate of the income tax may cause a significant dead-weight loss. Moreover, the tax system has some features that reduce its efficiency: savings that can be used to reduce the income tax have a cap; enterprises’ retained profits are taxed, and, on the other hand, there are some unjustified tax credits. The complexity of the tax system increases the compliance cost and facilitates evasion. For these reasons, this paper proposes substituting the actual income tax by a tax structure consisting of a single-rate cash flow tax (CFT) and a labor tax with a maximum rate below that of the CFT.
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Article provided by Instituto de Economía. Pontificia Universidad Católica de Chile. in its journal Cuadernos de Economía.
Find related papers by JEL classification: H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
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