Kan Wobbles On Japanese Tax Reform

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

05 August 2010

Without the support of the upper house, where the opposition now commands a majority since the recent election, the Japanese government will not be in control of its budget, even if it is passed by the Diet. Prime minister Naoto Kan is now soft-pedalling on proposed increases to the consumption tax.

In the first lower house Budget Committee meeting since Kan became prime minister, the issue of tax rises and fiscal reform, was the main part of the agenda. From the beginning, Kan conceded that his consumption tax rise proposals were a key factor in his party's electoral defeat, but reiterated his resolution to restore health to state finances.

Most commentators admit that Kan was right in his contention that the tax rise was a policy challenge any Japanese prime minister would have to address, but he weakened his case by saying at a press conference that he did not intend to promise a consumption tax increase as part of his DPJ presidential campaign in September when he is seeking re-election. He said his prime task was to cut out wasteful spending. Such mixed messages are being criticized increasingly in the Japanese media.

The signs are that Kan is more intent on winning re-election as party head by not antagonizing critics in the party than on putting a clear and compelling case for his tax proposals to the electorate. He is not showing a clear line on how he intends to gain cross-party agreement on the consumption tax.

During his question and answer session last Monday Kan agreed to consult with the opposition on the fiscal 2011 budget, but there was unease at his vagueness about how or when these consultations would take place. The Japanese opposition LDP party has attacked the DPJ ruling party's tax reforms, including the consumption tax rate increase, on the basis that it was not part of the manifesto on which it was elected.

Kan is set to face lengthy cross-examination on the subject at both the Upper and Lower Houses' Budget Committees.

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