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Discord is increasing between two key government panels debating whether to prioritize tax cuts or fiscal belt-tightening.

The tax debate, launched in January, has the heads of the Council on Economic and Fiscal Policy and the Tax Commission squaring off.

On the one hand, Heizo Takenaka, economic and fiscal policy minister, is calling for quick tax breaks to boost the flagging economy. On the other, Tax Commission head Hiromitsu Ishi, who is also president of Hitotsubashi University, stresses a combination of tax cuts and hikes to keep tax revenues unchanged.

The economic council, headed by Prime Minister Junichiro Koizumi and supported by Cabinet Office bureaucrats, oversees the government’s macroeconomic policy as a whole. The tax panel, an advisory body supported by Finance Ministry officials, helps design the specifics of the tax system.

Apparently aware of the rivalry, Koizumi in January instructed the two panels to cooperate on tax reform.

Takenaka’s economic council is scheduled today to compile its tax reform blueprint centered on short-term tax relief. Ishi’s panel plans to draft its reform guidelines by early June.

“The panels’ different priorities lead to a core question to which the Koizumi Cabinet has yet to provide a clear answer: whether the government should focus on economic stimulus or fiscal reform,” said Yasunari Ueno, chief market economist at Mizuho Securities.

Although the panels share the same goal of revitalizing the economy while reducing Japan’s increasing dependence on debt issues to finance expenditure, the country’s ongoing economic slump has fueled a sense of crisis in the economic council.

Takenaka heated up the debate further during an Osaka symposium Sunday, saying, “We will discuss lowering the basic rates of individual income and corporate taxes.”

In response, Ishi told a news conference Tuesday that his panel aims to broaden the tax base by lowering the minimum taxable income threshold while accepting the rate cuts proposed by Takenaka. This combination would keep overall tax revenues at current levels by taxing the poor more while cutting taxes for the rich.

Ishi has repeatedly claimed that virtually no tax measures can boost the economy quickly.

“Despite the ongoing debate between the two panels, I believe Takenaka’s stimulus approach will prevail eventually,” Ueno said. “It is because a (hoped-for) quick economic recovery by Japan has now become a matter of international concern.”

The tax relief expected to be included in the council’s blueprint would be implemented in fiscal 2003.

Steps being considered include tax cuts on monetary gifts from parents to offspring hoping to purchase a home as well as on corporate equipment investment, land transactions and stock trading.

The council also proposes that comprehensive reforms be introduced in the medium and long term, during which the government would aim to lower the minimum taxable income and simplify the tax code.

Tax revisions in the long run might include a consumption tax hike — a political taboo the government has so far largely refrained from talking about — together with social security reform to reduce public spending.

Ueno, however, questions the efficacy of tax breaks as proposed in the council’s plan, asserting those steps are unlikely to improve the economic situation drastically.

“My impression is that the council wants to introduce tax breaks quickly as part of government efforts to fight deflation,” Ueno said.

But deflation cannot be dealt with effectively in the short term, he argued.

Ueno said the proposed gift tax break, for example, would not boost consumption substantially. He also questioned whether the proposed tax relief in equipment investment would really increase corporate capital spending given dismal business confidence.

Economic observers are also divided over the idea of granting tax breaks before beginning fundamental reforms.

Masaru Takagi, an economics professor at Meiji University, argues that the steps currently being studied by Takenaka are not sufficient to support the flagging economy.

“Implementation of investment and gift tax breaks should take place sometime during fiscal 2002, not fiscal 2003 as studied by the council,” Takagi said. “Tax measures are necessary to shore up the economy.”

Takagi added that he is “deeply concerned” that the government has eased its preparedness for an imminent economic crisis on the recent improvement in stock prices.

Even if stimulus-measure tax breaks are significant, the question remains over how to finance the measures, especially with current budgetary constraints.

Under Takenaka’s tax reform proposal, the government would fund the tax cuts by reducing expenditures and selling government-owned assets, including real estate and securities.

Ueno remains skeptical on this idea: “There are no extra funds that can finance tax cuts beginning in fiscal 2003. Expenditure cuts will be impossible in such a short time. Only an extra budget for fiscal 2002 can do that.”

Drafting an extra budget for fiscal 2002, which starts Monday, would inevitably push up bond issues beyond the 30 trillion yen cap pledged by Koizumi. That would be politically damaging for the prime minister.

“There will come a time when Koizumi will have to openly discuss breaking the 30 trillion yen bond cap,” Ueno said.

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