Kan Calls For Cooperation On Japanese Tax Reform

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

26 January 2011

Japan’s Prime Minister Naoto Kan has repeated his call for all political parties to join together in agreeing the tax reform required for the country, including a rise in consumption tax.

Speaking at the opening of this year’s parliamentary session, Kan said that the Japanese public would have to suffer their part of the “burden.” This was a reference to the government plan for an increase to Japan’s 5% consumption tax, expected in its forthcoming reform programmes.

The government will need the support of opposition parties for passage of the consumption tax increase through parliament, while the government is also nervous of proposing its increase following its shelving after a proposal to double it to 10% became a major cause of the government’s unpopularity and electoral defeat in July last year.

Kan has however accepted that he had, last year, been unable to explain a rise in consumption tax sufficiently to get the public’s approval, but that it was now imperative to discuss such an increase, and further reforms to the tax system, linked directly to providing the financial resources necessary to fund the rapidly-increasing costs of pensions and health care.

He has therefore repeated his call for discussions across parliamentary party lines to obtain as wide-ranging an approval for tax reform as possible. However, while he has reiterated that present taxes will be unable to provide the necessary revenue to cope with increased social security costs, it is said that he is unlikely to receive the necessary support with his own Democratic Party also remaining divided on the policy.

In fact, the government’s draft budget proposes a halving of Japan’s primary deficit (excluding debt servicing costs) of 6.4% of gross domestic product (GDP) in the current fiscal year to 3.2% of GDP in 2015, with the target of a primary budget surplus in 2020.

However, a new projection released by the Cabinet Office has forecast that, if the economy grows by an annual average of some 1.5% of GDP, Japan’s primary budget deficit would still increase to JPY23.2 trillion (USD280bn), or 4.2% of GDP, in 2020. As it has been estimated that each 1% consumption tax increase provides additional revenue of around JPY2.5 trillion, it would need, at the least, a 9% rise in the tax to make the government’s target a reality.

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