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The government Tax Commission, in a set of recommendations to the prime minister finalized Wednesday, called for cautious discussions about limiting the use of consumption tax revenues for welfare purposes.

The panel’s suggestion may affect talks between the Liberal Democratic Party and its ally-to-be, the Liberal Party, both of which are considering limiting the use of the 5 percent consumption tax.

In the report prepared for Prime Minister Keizo Obuchi, the government advisory panel says the issue must be carefully examined from various perspectives, including social welfare reform and policies in other countries.

The report describes both pros and cons expressed during the panel’s discussions. Proponents have argued the proposed change could help people support the consumption tax if the revenues clearly contributed to welfare.

Opponents have said limiting the use of the tax could distort the allocation of resources, noting that more than 40 percent of consumption tax revenues is currently used as a revenue source for local governments.

At a news conference later in the day, Hiroshi Kato, head of the Tax Commission, said there is no reason to oppose the plan if the tax revenues are to be used primarily for — but not limited to — welfare.

On the other hand, the report says it would be wrong to reduce the consumption tax even temporarily, because this indirect tax will be increasingly important in a graying society, where revenues from income taxes are expected to decline.

Kato, also president of Chiba University of Commerce, said the panel must now tackle a radical income tax reform because the 4 trillion yen cuts for next year are only a part of it.

He said the reduction in income tax rates, already decided by the government, is not sufficient, stressing the need for structural reform, including the scope of taxation.

He pointed to the unusual situation preceding the fiscal 1999 tax revisions, referring to two one-time income tax redemptions and Obuchi’s promise earlier this year to cut taxes. The one-time cuts distorted the tax system by raising the minimum taxable income, Kato said.

In August, Obuchi promised the 4 trillion yen tax cuts and the lowering of the maximum tax rate from 65 percent to 50 percent. The promise has been kept but has not led to a comprehensive reform.

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