Kan Procrastinates On Japanese Tax Reform

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

04 February 2011

While it had been assumed that Japan’s Prime Minister Naoto Kan had put tax and social security reforms at the top of his government’s priorities, he appeared to cast doubt on whether he was prepared to carry out those reforms during a House of Representatives budget committee hearing.

The credit rating agency, Standard & Poor’s, had expressed concerns that the Japanese government did not have a “coherent strategy” to resolve the country’s fiscal and debt problems when it recently downgraded Japan’s long-term rating and doubted that the problem could be resolved by the current internal debate on reform.

The government’s reform programme had been expected to include, particularly, a hike in Japan’s 5% consumption tax, despite the government still being nervous of proposing such an increase after a proposal to double it to 10% became a major cause of its losing its majority in the parliamentary upper house last year.

Kan has previously reiterated on a number of occasions that it was now imperative to discuss such a consumption tax rise, 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. Members of the government have been stressing at every opportunity that present taxes will be unable to provide the necessary revenue to cope with increased social security costs.

However, the conclusion that the Japanese government has not yet decided on its approach to tax and social security reform appears to have been confirmed by Kan’s comments to the House hearing. He has now said that the government would not raise the consumption tax if it was found not to be necessary.

While he concluded his remarks by saying that, if the problem of affording a revamping of Japan’s social security system was to be resolved, he believed that a tax increase would be unavoidable as the funding could not be found elsewhere, the parliamentary opposition parties have been able to repeat their accusation that the government is lacking a credible programme to tackle the country’s fiscal deficit and debt problems.

Kan has also caused more confusion by indicating that, while the government has promised to produce its tax and social security reform plans by June this year, any increase in consumption tax would not happen before the expiry of the current term of the House of Representatives in August 2013.

In any case, with repeated calls for Kan’s resignation and for early elections to be held, it is said to be doubtful whether the government can even survive in the short-term. In addition to opposition from the other parties, Kan’s own Democratic Party has also remained divided on tax reform.

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