Japanese Panel Gives Three Tax Options For Reconstruction Budget

by Mary Swire, Tax-News.com, Hong Kong

20 September 2011

A tax panel, appointed by Prime Minister Yoshihiko Noda’s new government, has recommended three options for funding reconstruction in the earthquake and tsunami-hit north-east of Japan, each of which involves tax increases.

The panel’s proposals envisage the raising of some JPY11.2 trillion (USD145bn) over a period of up to ten years. It has, however, provided three optional tax-raising scenarios from which to choose, and said that the government needs to clarify how it plans to provide the necessary funds for reconstruction, before it goes ahead with its plans for a third supplementary budget next month.

It was reported that the first option would increase individual and corporate income taxes, while the second would also add revenues from hikes to taxes on items such as tobacco and alcoholic drinks. The third option would involve raising Japan’s consumption tax rate. It is also possible that the government would, initially, issue reconstruction bonds to be repaid, subsequently, from the increased tax revenues.

It is expected that the tax committee of the ruling Democratic Party of Japan (DPJ) will now be asked to consider those options, before further meetings within the party and the government to decide on definitive budget proposals to present in parliament.

With regard to the option of raising the current 5% consumption tax rate, however, Noda has already said that such an increase would not be possible without an electoral mandate (but that now was not the time to call an early election), and, as a separate matter, gradual consumption tax rate increases in the period to 2015 have already been proposed to reduce the country’s fiscal deficit.

Furthermore, while the government’s tax panel has itself suggested that a further JPY5 trillion could be found from non-tax sources, and Finance Minister Jun Azumi has said that he would look at the sale of state-owned assets, such as Japan Tobacco, to reduce the need for tax hikes as far as possible, some DPJ members want to eschew increased taxes completely, and rely wholly upon asset sales and uncovered bond issuance.

It is still hoped that the DPJ will be able to provide the definitive proposal for talks to be held with the opposition Liberal Democratic Party, so that the supplementary budget can be presented in parliament in the middle of next month with some chance of being passed.

Recommended