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Japanese Tax Hikes Unavoidable

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

29 June 2011


While calling for Japanese politicians to unite around its proposals, the government-appointed Reconstruction Design Council, which was tasked with devising reconstruction and rehabilitation proposals following the earthquake and tsunami in northeast Japan in March, has issued its final report.

As expected, the Council, led by Makoto Iokibe, who is head of Japan’s National Defence Academy and was appointed by the Prime Minister Naoto Kan in April, has recommended that the government should issue reconstruction bonds for a limited, as yet unspecified, period, with their repayment linked to a temporary increase in a mix of the country’s ‘core taxes’ – presumably, consumption, individual income and corporate taxes.

That recommendation is seen to be of significance, as the decision on how to provide for the large amount of funds required for reconstruction has been delayed, largely by the government’s inability, in the face of parliamentary opposition, to decide on how best to provide for it.

In particular, as Japan’s present public debt already totals around twice the size of its economy, there has been doubt over what proportion of the cost of reconstruction could be found by the issue of government bonds, and what taxes would need to be increased to pay for the remainder.

While the expected total damage caused by the disaster (excluding that caused by the Fukushima nuclear power plant) has been reduced to some JPY17 trillion (USD210bn), from previous estimates of up to JPY25 trillion, it cannot be seen how the Japanese government can now avoid a discussion on what taxes would have to rise and the amount and timing of the increases necessary.

A first supplementary 2011 budget, amounting to an initial JPY4 trillion, was passed in early May this year using available funds, but the government had then indicated that a further large supplementary budget, to take care of the bulk of the country’s reconstruction and rehabilitation efforts, would be announced this month. That has subsequently been delayed until August.

It had been assumed that the second supplementary budget would amount to at least JPY10 trillion, but the government has since announced that an interim package of up to JPY2bn would be formulated next month, to cover urgent short-term reconstruction needs. It was, however, non-committal on funding, saying that the small budget would not entail the issuance of government bonds for its finance, but would use “other financial resources”.

For the bulk of the reconstruction costs, the Council has now said that the resultant financial burden should be borne by the current generation, without passing it on to subsequent generations. The issue of reconstruction bonds should therefore be covered by temporary hikes in the so-called core taxes.

It also called for the establishment of special zones in affected areas, which would promote investment in agriculture and industry by deregulation, such as simplified land use application procedures, and lower taxes.

TAGS: tax | economics | sales tax | fiscal policy | budget | corporation tax | individual income tax | Japan

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