TAX NEWS - June 2010
Japan Tax: Japan's politically touchy debate on sales tax hike
Kan's call last week to discuss doubling the 5 percent sales tax was a major shift from his Democratic Party's stance under his predecessor, Yukio Hatoyama, who had vowed not to raise the tax for four years after taking power in 2009 with pledges to cut waste and give consumers more cash to boost demand.
Playing with the idea remains politically risky ahead of an upper house election on July 11, for which campaigning officially began on Thursday, but Kan is betting that he could convince voters to tolerate the painful tax hike, given growing worries about massive debt and rising social welfare costs.
Here are some questions and answers on Japan's consumption tax, which is one of the lowest among major economies.
WHY DID THE NEW PM BRING UP THE ISSUE NOW?
Kan's willingness to broach the sensitive topic reflects the seriousness of Japan's bulging public debt and the challenge of funding welfare and pension costs for a rapidly ageing society.
Japan's outstanding public debt is near 200 percent of GDP, the highest among advanced economies, keeping bond investors and voters wary as the government tries to balance the need for stimulating the economy with a need for fiscal prudence.
"Debating the sales tax has long been seen as a political taboo. But for the Japanese people and for us politicians to achieve a strong economy and strong fiscal condition, we dared to mention this," Kan told a news conference last week, where he stunned listeners by citing a possible rise to 10 percent.
HOW LIKELY IS THE CONSUMPTION TAX HIKE AND WHEN?
Kan said this week it would take at least two to three years to implement a sales tax hike, adding that the government would start a full-fledged debate on the tax after the upper house election.
He plans to map out his party's own proposals for tax reform, including the size of a future sales tax hike, by the end of the fiscal year to March 2011.
Kan has called for a multiparty debate on the politically sensitive issue and said the government should first seek a mandate in a general election, which must be held by late 2013, to implement any sales tax hike.
But other parties are either refusing or saying they would participate only on certain conditions.
The main opposition Liberal Democratic Party is calling for a sales tax rise to 10 percent in its election platform, but is criticising Kan for using its calculation without saying how the Democrats would mesh such a hike with their previous promises on spending programmes such as child allowances.
Economists have long said a hike is inevitable to help restore Japan's tattered finances and fund growing pension, medical and social welfare costs for a greying society.
The government could raise some 2.5 trillion yen ($27.6 billion) annually by raising the tax by 1 percentage point.
HOW DID IT PLAY OUT IN THE PAST?
Japan last raised the tax, to 5 percent from 3 percent, in 1997, a move that was followed by a sharp economic downturn and a big election defeat for the ruling party.
But people may now be more willing to tolerate a rise because of worries about creaky pension and health care systems and the spectre of a Greek debt tragedy.
A poll by the Yomiuri newspaper showed on Monday that 48 percent of voters supported Kan's remarks on possibly doubling the sales tax in the future, against 44 percent who did not.
Kan's gamble may be less risky than precedent suggests. But voter support for his government, which had jumped right after he replaced Hatoyama, fell this week with one public opinion survey showing an increase in opposition to the government among those who do not favour the sales tax hike.
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