Photographer: Ronald Patrick/Bloomberg

Income Taxes are Elephant in Room for Chilean Inequality

A higher-than-average tax threshold is limiting government's revenue and hurting the country's inequality problem

In a country seemingly obsessed with narrowing the income gap, there is an elephant in the room that no politician wants to mention, let alone in an election year.

Chile's government earns less from income taxes than any other country in the 35-member OECD — far less. That implies they are missing an opportunity to tax the rich more.

Instead, the administration of President Michelle Bachelet focused elsewhere in the tax code, opting to raise the corporate tax rate in a bid to fund spending increases on health and education in 2014. Many in the business community have blamed that decision for three years of falling investment.

Some of that low tax intake can be attributed to a high share of professionals in Chile who choose to get paid through "investment societies," earning a profit rather than a wage.

And it's not the income tax rate that makes Chile stand out from the rest of the OECD — the country's top bracket of 35 percent is in line with many other countries.

What is different is the tax threshold. Chileans don't even start paying tax until they earn 180 percent of the average income, compared with the average for the OECD of 39 percent.

Not surprisingly, not a single candidate from the left or the right is proposing higher taxes on Chile's burgeoning middle class. Instead, the debate ahead of November's presidential election is over a second reform to corporation taxes: simplifying the current system or even reducing rates.