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How debt, tax hike will affect reconstruction

Kyodo

To finance reconstruction in areas devastated by the Great East Japan Earthquake, ideas have been floated for issuing debt or raising the consumption tax . Below are questions and answers about the proposals.

What is the idea behind issuing state debt for reconstruction?

The government and ruling bloc are considering a special bond issue to finance an extraordinarily expensive reconstruction effort. The money raised, along with money raised from charity and passed on to the government, would be combined and managed under an account separate from the general state budget to finance reconstruction.

How would it be different from regular government bonds?

Funds for repayment would be pledged beforehand with a tax hike in the future. With a debt of more than ¥900 trillion, Japan is in dire fiscal straits. A massive JGB issuance would cause a disastrous spike in long-term interest rates. By showing that a “repayment plan” is in place, bureaucrats and politicians are hoping to show that fiscal discipline can be maintained during the fundraising process.

Are there any other challenges associated with the plan?

One of the problems is whether the government will be able to drum up enough support for a tax hike to secure repayment funds. There is also no consensus on whether consumption, individual income, corporate income or other taxes should be increased.

The sales tax appears to be the one being targeted by the government and the ruling Democratic Party of Japan. The issue of which levy to raise is likely to be one of the main discussion points in the days ahead.

Why does the consumption tax look so attractive?

The consumption tax allows the burden to be spread broadly over the population. According to one estimate, a hike of one point could raise tax revenue by around ¥2.5 trillion.

Are there any problems with raising the consumption tax?

Some argue that victims of the disasters should be exempted from any tax hike. Koichiro Genba, the DPJ’s policy chief, has indicated that special consideration might be made for people in disaster-hit areas, but no specific ideas have been presented. Another fear is that a tax hike will become a drag on the economy by dampening consumer spending, which accounts for about 60 percent of the economy.

How about other taxes?

There are also proposals being made to raise taxes on household or corporate income. Fumihiko Igarashi, senior vice finance minister, has said, “We will have to ask individuals and corporations with large incomes and revenues to shoulder greater burdens than others.”

Why would that be better than hiking the consumption tax?

Because it would be easier to exclude individuals and businesses struggling in disaster-hit areas. Individual income tax, however, tends to disproportionately rely on the active working population, while raising the corporate income tax could undermine the global competitiveness of Japanese firms.

Other proposals call for increasing the liquor, tobacco or gift and inheritance taxes.

Are there any other steps being studied aside from tax hikes?

In the DPJ, calls are growing to trim budget appropriations for projects other than reconstruction before starting debate on increasing taxes.