Chilean legislators debate on VAT reduction amid economic crisis

Special Report:Global Financial Crisis

SANTIAGO, March 5 (Chinese media) -- Chilean legislators on Thursday started a

debate on whether to reduce the Value Added Tax (VAT) to battle the unfolding

global economic crisis.

The Party For Democracy (PPD) from the four-party coalition government said

on Thursday it will present a proposal agreed with the other three parties to

lower the 19 percent VAT.

However, Andres Velasco, Chilean treasury minister said the reduction is

unsuitable as it could affect the goods and services of the government.

The opposition based their argument on the regressive effects of VAT, which

applied to both rich and poor but has more negative result on the poor who

devote almost 100 percent of their income to consumption.

The legislators are seeking to impose a higher VAT on sumptuary or luxuries

products and a lower one on necessities.

Analysts have so far failed to come up with an agreement on the

effectiveness of the VAT reduction.

Due to a sharp contraction in added demand there must be a very low

interest rate and a depreciated real exchange rate, which can be complemented

with a VAT reduction, said expert Gonzalo Sanhueza.

Reduce the VAT by two points will raise the income of the families,

Sanhueza said.

Guillermo Pattillo, professor from the university of Santiago, said the VAT

reduction will not help surviving the crisis "because reducing the VAT will

generate bigger incomes of the people with high level of resources, but will not

increase their expense."