The Liberal Democratic Party’s tax panel is moving to propose abolishing tax reductions in fiscal 2006 on condition that the economic recovery is maintained, political sources said Saturday.

The proposal being finalized by the LDP Tax System Research Commission calls for the government to halve the tax reduction rates in fiscal 2005 before entirely abolishing the tax cuts the following year, the sources said.

Whether the tax cuts will be abolished entirely will be decided after the government examines economic conditions at the end of 2005, according to the proposal.

The LDP will hold talks with its coalition partner New Komeito over the proposal Monday to devise a final tax policy, the sources said.

New Komeito has been cautious about scrapping the tax cuts outright out of fear this would hurt the fledging economic recovery. The party has instead proposed eliminating the tax cuts in fiscal 2007.

The reductions in the national income tax and local income tax were introduced in 1999 as an economic stimulus measure.

The tax break allows 20 percent of income tax, or up to 250,000 yen a year, and 15 percent of local income tax, or up to 40,000 yen a year, to be deducted. Reductions are worth a combined 3.3 trillion yen in income tax.

The cuts, however, have widened the national and local governments’ budget deficits.

The Finance Ministry has judged that corporate earnings have improved and banks are likely to solve their bad-loan problems during the economic recovery.

Total abolition of the tax cuts would represent tax increases of 3.3 trillion yen, the largest since the consumption tax rate was raised from 3 percent to 5 percent in April 1997.

The Tax Commission, the government’s tax panel, called last month for eliminating the tax cuts in two stages — curtailing the margin of tax reductions in fiscal 2005 and abolishing them the following year.