Shortly after coming to power on March 11 and moving to live in the presidential palace, the new president of Chile, José Antonio Kast, found himself with a piano that he could not open.

In a television interview he said, jokingly: “Proposals to fix the piano are accepted.” And he immediately added that it had to be an ad honorem service because “there is no money.”

That phrase thrown into the air casually was the beginning of a narrative of scarcity reinforced by its ministers around ideas such as “the State ran out of funds” or “the fiscal coffer is empty.”

To reduce the fiscal deficit, Kast launched his own chainsaw of Chilean-style cuts, as Javier Milei did in Argentina.

Under the banner of austerity and the efficiency of public spending, the government announced cuts of close to US$2,000 to “organize finances” and stabilize fiscal debt.

The government is promoting “a deep fiscal adjustment, without touching social benefits,” Kast said in early June in his first Public Account, the annual speech before Congress.

The cuts - which have affected multiple ministries - affected the budget of such sensitive portfolios as health and education, causing massive protests in the streets of Santiago.

“The government showed that it is going to govern for the powerful,” criticized Andrea Abarca, spokesperson for the Confederation of Chilean Students (CONFECH) during one of the demonstrations.

For the government, one of the central objectives is to prevent the State from spending beyond its means, he says, but the path does not look easy. He recently asked Congress for permission to increase the debt limit by more than 30%.

One of Kast's biggest bets is his so-called National Reconstruction Plan, known as the mega-reform, a bill that includes a series of economic, tax, and labor measures whose approval is now in the hands of the Senate.

Within this mega-reform there is a controversial tax package that includes, among other things, a gradual reduction in the tax paid by a company's profits from 27% to 23%.

And it is on this reduction and its tax consequences that we are going to focus on in this article.

The tax cut debate

A decrease in taxes means less revenue to the fiscal coffers at a time when there is a shortage of resources. However, the government argues that the reduction will be an incentive for companies to invest more, generate jobs and generate economic expansion.

"This is not a tax that goes down for the rich. It is a tax that goes down for companies, so that they have more money to invest," said the Minister of Finance, Jorge Quiroz, when justifying the decrease in taxation of companies. “The problem is not raising more, but growing.”

A similar argument was defended by US President Donald Trump when he lowered the federal tax paid by companies from 35% to 21% in 2017.

Did economic growth increase? That remains a matter of debate. The answer is yes or no, depending on the view of the economist who is asked, because in these matters there is no 100% technical answer.

If this were the case, it would be enough to analyze the examples of countries where corporate taxes have been cut and determine if growth increased exclusively due to the tax reduction.

In any case, some studies have been published that analyzed whether companies that benefited from the tax reduction reinvested their funds in productive activities that create jobs and drive growth.

The evidence showed that a significant part of the profits that companies in the US obtained with Trump's tax cuts were allocated to “stock buybacks”, a mechanism that directly benefited shareholders and senior executives.

In Chile, opponents of the corporate tax cut - along with other tax measures that benefit large companies - assure that it will have negative social effects, will generate a permanent drop in revenue and a concentration of profits in large companies.

They also raise serious doubts about how much investment and employment would really increase.

Economist Andrea Repetto, director of the School of Government at the Catholic University of Chile, argues that the proposal “is expensive, with clear costs and uncertain benefits.”

It will generate a loss of fiscal resources, he tells BBC Mundo, because “the revenue is not recovered with the growth itself.”

The spending cuts that the government seeks to make to finance the deficit, he specifies, "risk taking away resources from programs that have value for citizens."

The increase in debt and the fiscal deficit are issues that worry experts who have managed public finances in the past.

The former Minister of Finance of Chile during the first government of Michelle Bachelet, Andrés Velasco, dismisses the official position.

“We have seen that movie so many times,” he said in an interview with a Chilean media.

"President Reagan in the United States, in the 1980s, invented this thesis of lowering taxes and that the deficit would shrink. And what happened? The deficit grew and the debt went through the roof," Velasco said.

Although what sounds most popular is the tax reduction, the government's proposal goes much further.

It seeks to fully integrate the taxes paid by companies with the taxes paid by their owners. This integrated system would allow owners to use 100% of the tax paid by their company as a credit when they pay their personal taxes.

In addition, it includes the creation of tax invariance for 25 years for investment projects over US$50 million, property tax exemptions, a temporary incentive for capital repatriation and a tax credit for labor hiring.

Kast's mega-reform also proposes a battery of measures against regulations considered as "obstacles" to investment permits, something that in Chile is known as "permitology."

In many cases, the elimination of those regulations is as important for business as the tax reduction.

Comparison with the rest of the world

When announcing the mega-reform on April 15, Kast defended the reduction of the corporate tax by making a comparison with the 38 countries that are part of the Organization for Economic Cooperation and Development, OECD, among which is Chile.

"Bad decisions have consequences. While since 2000 the OECD has been lowering its corporate taxes from 31% to 22%, Chile raised them from 15% to 27% in that same period," said the president.

Although the data is not precise for the OECD (the average fell from 32% to 24%) the trend is true: the OECD lowered taxes and Chile raised them.

But… what nuances are behind this comparison?

Economists in favor of the official proposal usually cite Ireland or Estonia as exemplary countries in their tax designs.

“It seems to me that the most efficient system is Estonia's,” says economist Cecilia Cifuentes, director of the Center for Financial Studies at the ESE Business School at the University of the Andes.

One of its virtues, he affirms, is that it has a “flat rate” of corporate taxes, where all companies - whether small or large - pay the same tax.

The Estonian model is one of the most unusual in the world. In the Baltic country, the profits (profits or profits) of companies only pay taxes when they are distributed among the owners. And when that happens, the shareholder typically pays no other personal tax on those gains.

In that sense, it works as an integrated system between the taxes paid by the company and the taxes paid by the owners.

There are very few countries with an integrated system. In the OECD, for example, Australia, New Zealand and, to a large extent, Canada have it.

The rankings trap

With such different systems, comparing the Chilean model with others is very difficult.

And even more confusing are the rankings that only take into account the rate established by the laws on paper (called Statutory Tax Rate, in English).

This rate does not include deductions, credits, exemptions or incentives: therefore, it does not reflect what companies actually pay in taxes.