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Thursday, Sep. 29, 2011

ANALYSIS

Plenty of problems in tax hike plan

Estimates of nontax revenue to fund quake rebuilding too optimistic


Staff writer

The government and the Democratic Party of Japan have finalized their temporary tax hike plan and will ask the public to cough up ¥11.2 trillion to help reconstruct the disaster-hit Tohoku region, but experts Wednesday were quick to point out flaws in the hastily prepared blueprint.

The plan, which will cover approximately 10 years, will raise the income tax by 4 percent beginning in January 2013, will raise the cost of tobacco by ¥2 per cigarette starting in October 2012, add ¥500 to the residential tax from June 2014 and reduce the size of the corporate tax cut scheduled for next April.

"It's obvious that the government needs financial resources for reconstruction and that a tax hike is inevitable," Kazuhiro Yoshii, managing director of the legal and tax research unit at Daiwa Institute of Research, told The Japan Times.

"Had the tax panel opted to discuss a possible hike in the consumption tax, then the span of the temporary measure could have lasted only a year and a half," Yoshii said, expressing concern that the tax panel did not properly weigh all options.

Calculations show the government's plan will cost about an additional ¥3,500 per year for a family with two children with an annual income of ¥5 million. The tax hike for the same family with an income of ¥3 million will be around ¥1,000, while a family making ¥10 million a year will pay approximately ¥27,000 more.

The increase in taxes was kept at a minimum to answer opposition within the ruling DPJ to any hike, but only because the government projected it will be able to gather ¥5 trillion in nontax revenues.

DPJ policy chief Seiji Maehara also hinted Tuesday that another ¥2 trillion could eventually be found through other means to further reduce the burden on taxpayers.

But pundits say such predictions are overly optimistic.

One major source of nontax revenue would be to sell all government-owned shares of Japan Tobacco Inc., a move expected to secure about ¥1 trillion. The government intends to sell off its holdings but can't do so until laws prohibiting such sales are revised.

Another task for the government will be to negotiate with opposition parties and reach a consensus on the tax hikes by early October, before submitting the bills for this year's third supplementary budget focused mainly on measures to rebuild Tohoku.

But key players in the Liberal Democratic Party, including tax policy chief Takeshi Noda and former Finance Minister Bunmei Ibuki, have already said they are against selling the JT shares, considering the impact on domestic tobacco farmers. On the strength of its large stake, the government compels JT to buy domestically. If the company goes completely private, it would be free to buy cheaper tobacco overseas.

If sufficient nontax revenues can't be found, the government would have to rewrite the tax hike plan from scratch.

Even though the DPJ has now signed off on the plan, some of its lawmakers are likely to remain vocal in their opposition, which could cause headaches for Prime Minister Yoshihiko Noda's administration.

The party's tax panel was originally scheduled to reach an agreement earlier this week but was hampered by resistance from its members who aren't sold on the idea of a tax increase.

"A tax hike at this point will only hurt the economy even further and ultimately do no good for those working hard in Tohoku," one DPJ lawmaker said when the party's tax panel met earlier this week.

Some lawmakers also support extending the taxation period beyond 10 years in order to trim the annual cost the public shoulders.

Daiwa Institute's Yoshii said the plan finalized by the government Tuesday could still undergo a major revamp considering the conflicting opinions in both the ruling and opposition parties.

The government may actually end up relying on reconstruction bonds to secure enough resources, he added.

For some smokers, the tax hike plan is yet more "bullying" by the government.

"I realize the increase is necessary to rebuild Tohoku, but the government needs to stop beating up smokers whenever it is short of cash," Sagawa, a 67-year-old man who refused to provide his given name, said while puffing a cigarette in Edogawa Ward, Tokyo.

Sagawa is not alone in criticizing the government for its frequent hits on smokers, especially after the price of a pack of 20 cigarettes jumped about ¥100 last year, bringing JT's Mild Seven brand to ¥410.

Masakazu Shimizu, JT's executive deputy president, told reporters last week following a hearing at the Finance Ministry that another tobacco tax hike won't work as a source of steady income for the government and will end up disintegrating the government's 10-year plan.

"Tobacco tax revenues will not remain at the same level for five or 10 years; they will decrease," Shimizu said. Raising the tobacco tax should not be considered a source of steady income, he stressed.

In Edogawa Ward, Sagawa said another tax hike won't encourage him to cut down on his pack a day. But he criticized the government for running the same play over and over.

"Raising the tobacco tax is the easiest way to get the job done," he said. "But it's pathetic that the lawmakers always pick on us and don't try to come up with something original."



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The Japan Times

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