Japan’s government has proposed about Y11,200bn ($146bn) in tax hikes over the next 10 years to fund post-tsunami reconstruction, but the plans are likely to face opposition from within the ruling Democratic party.
The call from a government tax panel for temporary hikes to individual income and corporate taxes underscores the desire of Yoshihiko Noda, Japan’s new prime minister and a relative fiscal conservative, to ensure that the burden of rebuilding after the March 11 disaster is not left to future generations.
“It pains us, but we hope to be able to win the public’s understanding since this was an unprecedented disaster,” said Jun Azumi, Mr Noda’s new finance minister.
Government spending on reconstruction after the tsunami is expected to total at least Y19,000bn ($247bn) over the next five years, adding to the pressure on a state that already has gross debt equivalent to more than 200 per cent of gross domestic product.
However, many members of the ruling DPJ are concerned about the economic and political implications of raising taxes, arguing that Japan still has plenty of room to issue long-term debt to fund reconstruction.
Government officials stress that as well as raising taxes, they will trim spending and raise funds through possible sales of assets such as part of the state’s holdings in Japan Tobacco, which dominates the local cigarette market.
To soften opposition, proposals for a temporary hike in the consumption tax have been rejected and the proposed period of increase to individual income taxes extended from an initially discussed five years to 10.
Under the tax panel’s proposals, income tax would be raised by an average of 5.5 per cent, or by around 4 per cent if a tax increase on cigarettes was also imposed, with high earners bearing a much larger burden of the rise than those on low incomes.
The Yomiuri Shimbun, Japan’s biggest selling daily newspaper, reported that the increase would mean a typical household of two parents and two children with an annual income of Y5m ($65,000) would have an additional annual tax bill of around 4,300 yen ($56). Over the course of 10 years, such an income tax rise could raise more than Y7,000bn.
The proposals also include a temporary increase in corporate tax that would in large part offset a planned cut to the levy that was announced last year in an effort to boost business and slow the exodus of manufacturing overseas.
The tax plans are sure to be the focus of fierce debate in the Diet, Japan’s legislature, where the DPJ has struggled to pass legislation through an opposition-dominated upper house.
However, the biggest obstacles to the hikes could come from within the ruling party, with many supporters of Ichiro Ozawa, a DPJ heavyweight, seen as strongly opposed.
The proposals will now be discussed by a DPJ tax commission, which leaders hope will be able to approve them by the end of the month in order to clear the way for further discussions with opposition parties.
Hirohisa Fujii, chairman of the DPJ tax commission, acknowledged the internal differences, but warned failure to rein in state borrowing could lead to fiscal disaster.
“There will be understanding of the big picture. I believe that good sense will prevail in the end,” said Mr Fujii.
Get alerts on World when a new story is published