Saturday, Nov. 29, 2008

By TAKAHIRO FUKADA

Staff writer

The government's Tax Commission on Friday urged Prime Minister Taro Aso to clarify when the 5 percent consumption tax would be hiked to deal with the country's ballooning social security costs.

The tax panel, an advisory body to the prime minister but in reality less influential on policymaking than the ruling Liberal Democratic Party's tax panel, made the point clear in its recommendation before the government finalizes a midterm tax reform program by year's end.

"This commission strongly requests the government to draw up a midterm program that sufficiently reflects last year's recommendation contents, and clarifies the timing of implementing substantial tax reform," the commission said in its recommendation.

The commission last year said in a proposal that a rise in the consumption tax should be considered to finance the swelling social security costs stemming from the rapidly aging population.

The commission warned that social security benefits will increase at a faster pace than economic growth as the population rapidly ages.

"In order not to burden our future generations and to hand over a reliable social security system to the next generation, it is an urgent task (for the government) to secure financial resources necessary for increasing social security benefits, such as pensions, medicine and nursing care, and for countermeasures against the decreasing child population," the panel stressed.

The commission urged the government to clearly explain the relations between people's benefits and burdens, and to gain their acceptance of the reform.

The panel also recommended that a taxpayer numbering system be introduced to "realize appropriate and fair tax imposition."

For fiscal 2009, the panel made recommendations on cross-border taxation.

The government should not impose tax on parent companies' dividend revenues from their overseas units, the commission suggested.

While pushing tax reforms to correct state finances, the tax panel nevertheless acknowledges that the economic situation has dramatically changed since last year.

"The world's financial and capital markets have been in unprecedented turmoil," the commission said.

As the global economy decelerates, the domestic economy, which is dependent on external demand, is also in a recession with the chance of the downtrend being prolonged and deepened, it observed.

"To maintain the stability of people's living conditions and our economy, we think it is inevitable (for the government) to prioritize economic measures," the panel said.

The panel's recommendations drew mixed reactions from experts, with some welcoming them but others raising doubts about the reform-first approach amid the worsening economic situation.

Yasutoshi Nagai, chief economist at Daiwa Securities SMBC, said the panel is tasked with considering stable financial resources to maintain the social security system.

"Such a recommendation is inevitable, or taken for granted since the fiscal deficit is ballooning," Nagai said.

Takeshi Minami, chief economist of Norinchukin Research Institute, wondered whether clarifying the timing of a future tax hike would be beneficial for the economy.

"Implementing (economic measures) with a future tax hike would hardly help, or stimulate the economy," Minami noted, while also acknowledging the inevitability of a raise in the consumption tax as deficits swell.

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