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Monday, June 6, 2011

Q&A

Several factors driving plan to double sales tax

Kyodo

The government on Thursday announced a social security reform plan that includes a proposal to gradually double the consumption tax to 10 percent by fiscal 2015. Here are some basic questions and answers about the proposed tax hike.

Why does the government think the tax has to be raised?

The main reason is the aging population, which is rapidly swelling social security costs. The government says it cannot continue sustaining welfare services with the current level of tax revenues. Issuing debt is an option, but not necessarily the best one because of the deteriorating state of Japan's fiscal health.

Why the consumption tax?

The government says hiking the sales tax allows it to distribute the burden almost equally among the populace regardless of age or job situation, unlike the income tax, which largely targets current workers with income.

How heavy are the welfare costs the government is shouldering?

For fiscal 2011, which began on April 1, social security costs are projected to reach ¥99.6 trillion, with only ¥59.6 trillion of that able to be secured through premiums.

The central and local governments must shoulder the other ¥40 trillion through tax revenues and other funding sources. Such public contributions are projected to rise to ¥46.5 trillion in fiscal 2015, ¥53.4 trillion in fiscal 2020 and ¥61.3 trillion in fiscal 2025.

Why should the tax be raised in stages?

The government fears that a sharp hike would hurt the economy by weighing down consumer and business sentiment. The government is expected to sanction two 2- to 3-point increases starting in fiscal 2012.

Will the government have to raise the consumption tax further beyond 10 percent?

The government did not make clear how it would finance social security after fiscal 2015, which ends in March 2016. But economic and fiscal policy minister Kaoru Yosano said the government has to create another plan sometime after 2015, suggesting additional tax increases are due.

Can the government really go ahead with the reform plan despite the political disarray?

The government is expected to finalize the plan this month and submit it to the Diet next year. But Kan's announcement has made its prospects uncertain.



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