Tax

May 2005

Tax Commission Report To Lean Toward Burden Increase
The government Tax Commission's report due out next month will list areas for reform, but on the whole such reform will lead to increased tax burdens. The report appears to have a two-pronged focus: a drastic tax structure overhaul that has been made necessary by social change, and tax hikes. The Tax Commission's main focus is on reforming employee income taxes because society is diversifying away from the traditional family of four with a nonworking housewife, two children and lifetime employment. As a result of tax cuts and declines in personal income, income tax payments from workers have fallen to 14 trillion yen -- half of what they were in the early 1990s. The commission aims to boost such revenue to rebuild the government's finances. But before taxes are raised, an economic recovery and a sharp reduction in fiscal spending are necessary. And even if these two conditions are met, taxpayers still might resist. The government is not expected to carry out an immediate income tax hike. This is because a 1 percentage point increase in the 5% consumption tax would generate an extra 2.4 trillion yen in tax revenue, in contrast to the roughly 700 billion yen from abolishing tax deductions for spouses. Some in the government believe that a consumption tax hike would be a faster route to fiscal rebuilding. At a news conference Friday, Tax Commission Chairman Hiromitsu Ishi suggested a need for timing considerations. "Any income tax reform needs to be considered in conjunction with the consumption tax," Ishi said. So any serious discussion of scaling back deductions for salaried workers and wage earners is not expected to take place until discussion of a consumption tax hike is pursued in fiscal 2007 and beyond. Raising the consumption and income taxes simultaneously would be difficult. So should the possibility of a consumption tax hike fade, the commission recommendations to reduce salaried-worker deductions could become realistic much earlier than now foreseen. (The Nihon Keizai Shimbun, May 28, 2005)