A tax panel of the Liberal Democratic Party is set to begin work to overhaul the nation’s tax system in an attempt to help generate lasting economic growth.Attention is focused on how much more the LDP’s Tax System Research Commission, chaired by former Finance Minister Yoshiro Hayashi, can add to planned tax cuts already worth some 7 trillion yen — 4 trillion yen in income tax cuts and 3 trillion yen in corporate tax cuts. “I’m of the opinion that it is necessary to increase the amount of tax cuts,” Hayashi said in an interview, acknowledging implementation of larger-than-planned tax cuts will be necessary to nurse the moribund economy back to health.New tax cuts of any size will require a new financing source. Amid lingering concerns about deficit-ridden state finances, the powerful LDP panel seems certain to recommend the government depend on deficit-covering bonds to fund deeper tax cuts.Prime Minister Keizo Obuchi has said the government will freeze the belt-tightening Fiscal Structural Reform Law, enacted in November 1997, to allow the government to remove strict limits on its spending.One focal point of the tax system reform will be how the state and local governments share the burden for the planned tax cuts, which will likely be carried out in January, because neither wants to see tax revenues dwindle any further, Hayashi and other LDP officials said.Obuchi has pledged to lower the maximum combined rate for national and local income taxes to 50 percent from the current 65 percent. But it remains to be seen to what extent the central and local governments will agree to cut their respective top marginal rates — now at 50 percent for the former and 15 percent for the latter.Finance Minister Kiichi Miyazawa said in late August the rates should be trimmed to 40 percent for national taxes and 10 percent for local taxes. But he quickly retracted the remark in the face of fierce opposition from regional leaders.As for corporate tax cuts, Obuchi has also vowed to pare the effective corporate tax rate, or the combined rate of national and local corporate taxes, to about 40 percent from the present 46.36 percent.The plan is likely to face tough opposition, too.Because the national tax rate has already fallen to international levels at 31.08 percent, the government wants the local tax rate to be lowered from the current 15.28 percent. The LDP tax panel is expected to consider making up for a revenue shortfall seen by local governments by increasing tax grants from the central government.Another important issue in the overhaul is how to deal with middle-income taxpayers, or how to offer people with annual incomes of between 7 million yen and 10 million yen greater tax relief, the LDP officials said.Obuchi has promised to pass the benefits of tax cuts onto middle-income earners as much as possible, because their burden will be larger due to differences in structure between planned tax cuts and one-time cuts for this year.Major issues to be pondered by the LDP tax panel also include allowing deductions of housing loan interest payments and other tax incentives that would contribute to stimulating the economy, the officials said.
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