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Staff writer

The tax panel of the Liberal Democratic Party is in a bit of a bind.

The panel, which has recently begun to work on an annual tax revision package for fiscal 2000, is tasked with carrying out a fine balancing act between two opposing priorities: preparing tax breaks sufficient to stimulate the still-fragile economy and putting the brakes on the surging fiscal deficit.

Hot issues on the agenda include an inheritance-tax cut intended to help family-owned businesses, an extension of housing-loan tax breaks and tax advantages for the planned introduction of U.S.-style defined-cost pension plans.

The LDP’s Research Commission on the Tax System will also have to handle policy differences within the ruling tripartite coalition.

The panel plans to finalize a package around Dec. 16 so related bills can be submitted in January. It has a more direct say in annual tax reforms than the government Tax Commission, an advisory panel to the prime minister.

Last year’s package included 9.4 trillion yen in cuts in individual income, corporate, housing-loan and other taxes.

This year, the LDP panel members are apparently aware that the state’s stagnant fiscal health takes away their leeway to draft a package as big as previous ones; the government expects to be out at least 1 trillion yen in tax revenues this fiscal year, which would mark the third consecutive yearly shortfall.

More bond issues to finance tax cuts may boost long-term interest rates, which in turn is likely to derail any economic recovery.

But pressure for large tax cuts is expected to mount because a general election must be held no later than next October.

In August, Prime Minister Keizo Obuchi proposed slashing the maximum inheritance tax rate of 70 percent. A cut to 50 percent is a likely option. It would be in line with the maximum income tax rate, which was reduced this year from 65 percent to 50 percent, including the residential tax.

Obuchi hopes the tax cut will ease the burden on people who inherit small businesses from relatives.

Support for small and midsize firms is the central theme of the ongoing extraordinary Diet session, because the government believes they hold the key to revitalizing the economy.

The inheritance tax ranges from 10 percent to 70 percent in nine brackets. Slashing the maximum rate alone is considered ineffective because it applies to only about 10 inheritors a year. If the maximum rate is to be cut to 50 percent, other brackets would also have to be revised.

In addition to the tax cut, the panel is expected to consider easing the evaluation standards for unlisted stocks inherited by relatives of business owners.

But there is concern that these tax advantages could be unfair to entrepreneurs who do not inherit anything. Critics also say it is statistically unclear how much small-business inheritors actually suffer from the current inheritance tax.

The expanded income-tax deduction for housing loans was a major component in the last package. It enables home buyers in 1999 and 2000 to redeem up to 5.9 million yen over a 15-year period, depending on their outstanding loans.

Its effect has been clear so far this year, with private housing investment in the April-June quarter surging by a record 16.1 percent from the previous quarter.

But this tax break applies only to home buyers who actually move into their new houses by the end of next year. Those who sign contracts early next year may not be eligible because it takes many months to complete large condominiums. Hence calls are mounting for extending the applicable period.

Opponents say such an extension will undermine the rush-buying effect of the current tax break.

Another focal issue is taxes for the planned introduction in fiscal 2000 of portable pensions modeled on 401(k) plans in the United States. Taxes hold the key for the success of this system.

The Health and Welfare Ministry and other ministries want contributions to be tax-deductible, investment returns tax-exempt and the public-pension deduction system applied to retirement benefits. This could make almost the whole process tax-exempt.

But the nature of the new pension system is still unclear — whether it is a real pension or only another form of saving. Allowing too big a tax advantage could prove inconsistent with taxes on existing pensions. Some senior members of the LDP panel consider it necessary to tax at least part of the new pension.

Over these and other issues, the LDP panel needs to gain the consent of not only members of the party but that of its coalition partners — the Liberal Party and New Komeito.

Before the ruling block was formed in early October, the three parties agreed that all consumption tax revenues must be spent on social welfare. But details, including the timetable, remain undecided.

The three parties have no adjustment mechanism for tax policies.

As the recent disagreement between the LDP and Liberal Party over the planned public nursing-care system indicates, tripartite negotiations on tax revisions are expected to be hard.

“We want tax revisions to be finalized without losing the direction (the LDP sets),” said Yuji Tsushima, a senior member of the LDP panel.

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