MercoPress. South Atlantic News Agency

Relief for Piñera: congress approves tax reform to provide funds for education

The approval comes ahead of municipal elections in October

Chile's Congress approved on Tuesday major changes in tax laws aimed to provide funds for an overhaul of the nation's protest-hit schools, handing unpopular President Sebastian Piñera a welcome victory a month from municipal elections.

The tax overhaul driven by Piñera's conservative coalition will increase state revenue by some 1 billion dollars per year - about 0.4% of GDP in the world's biggest copper producer.

Businesses in Chile will face a higher tax rate of 20% and fewer loopholes to evade them, though the tax rate remains well below Latin America's average rate of 25.06% in 2011, according to accountancy firm KPMG.

Hefty tax cuts planned for the wealthiest were removed from the bill after months of jostling in Congress. Tax rates for lower income earners drop on a sliding scale.

Billionaire Piñera, rated the most unpopular leader since the return of democracy in 1990, unveiled the proposed reform in April in response to massive student-led protests demanding free education and greater equality.

While Chile has long been held up as an economic model in Latin America, it was rated the most unequal country of the 34-member-state Organization for Economic Cooperation and Development, or OECD.

The reform is not expected to calm student protests for free and improved education.

The approval of the tax lands right before local elections on Oct. 28, which will give an indication of how the right and the left - both struggling with low approval ratings - could fare in the 2013 presidential race.

The reform could give his conservative bloc a small boost in next year's presidential election, when leftist former President Michelle Bachelet is widely expected to try to stage a comeback.

“This is undoubtedly going to help the right more than Michelle Bachelet,” said Ricardo Israel, professor of law and political science at the Universidad Autonoma de Chile. “The right is taking away a flagship part of Michelle Bachelet's campaign ... she's going to have to move even more to the left.”