The Tax Policy in the Chilean Economy: a Regional Applied General Equilibrium Analysis

The main goal of this research is to analyze the tax reduction policy impact in sector and regional level and its effectiveness in the Chilean Economy by means of a regional applied general equilibrium model (AGE). A static, deterministic and top-down AGE model, known as ORANIG model with regional extension was adapted for the Chilean Economy that was re-named as ORANICL model. Regional particularities among Chilean regions are relevant when designing policies are oriented to improve welfare and the economic performance at regional and national level in the taxing and spending function with special attention to the value aggregated tax (VAT). A 1% reduction on the VAT increases real GDP in 0.64% and the aggregated employment in 1.60%. In the regional level a 1% of VAT reduction increases the activity level by 0.58%, 0.64%, 0.76% and 0.68% for North, Central, Metropolitan region of Santiago and South regions respectively. By the same shock, employment increases by 1.47%, 1.49%, 1.71% and 1.52% for the same regions respectively. Results yielded by a 1% of VAT reduction seems to be not enough to refute the hypothesis that the centralism approach adopted for the Chilean government is the best policy design choice. Likewise, we show that a regional AGE model is a powerful tool for policy analysis for Chile.