With demographic change affecting Japan’s finances more every day, the government’s tax panel proposed Tuesday the scaling back of tax breaks for the elderly and doubling the consumption tax to pay for rising pension and medical care costs.
In its medium-term tax reform proposals, the Tax Commission said the government will need to increase the consumption tax, which presently stands at 5 percent, to 10 percent or higher within the next 10 to 15 years.
The report also calls for steps that would make wealthier elderly people share more of the nation’s financial burden, including by trimming tax deductions for public pension payments.
“We cannot avoid the tax burden. We can no longer carry over the issue or hide it,” said Hiromitsu Ishi, head of the tax panel and president of Hitotsubashi University. “We will present options to the public and we want them to take part in discussions over which option we should choose.
“Demographic change will continue in the future,” he told reporters after submitting the report to Prime Minister Junichiro Koizumi. “It is impossible to maintain the social security system, including public pensions, medical care and elderly care services, unless the public as a whole shares the burden and the pain.”
After accepting the report, Koizumi reiterated that he has no plans to increase the consumption tax rate from the current 5 percent while he is in office, but added that the question will need to be addressed by his successors.
“I will not raise the consumption tax,” the prime minister said. “It is a task for the future Cabinet.”
Some experts say the tax hike proposal will meet strong opposition from the public as the country is still struggling to escape from the quagmire of deflation.
“What people want to know is what kind of welfare services the government will be able to provide after cutting back on their tax breaks. Without explaining things clearly, proposals for a higher tax burden only make people worried,” said Kazuhiko Nishizawa, senior economist at the Japan Research Institute Ltd.
He added that revealing the blueprint for Japan’s future social welfare system is the task of lawmakers, although they currently rely too much on health ministry officials when it comes to drawing up welfare policy.
Some experts also criticized the report on the grounds the proposals would impose an overly heavy financial burden on the elderly.
“Japan stands at a turning point in its economic and social structure, as the population will soon start to decline, fewer babies will be born and people will live longer lives,” the report said.
By 2015, one in four Japanese will be classified as elderly and the population is expected to start decreasing after reaching a peak in 2006.
To maintain the social welfare system, therefore, the country has to review its overall income taxation structure, which currently exempts people from the age of 65 and families who have lost their breadwinner from income taxes, the report said.
“While it is still necessary to take situations for low-income senior citizens into consideration, it is important to share the (tax) burden equally and not to provide tax breaks to seniors only based on their age,” the report said.
It added that the government first needs to review its fiscal spending, as well as carrying out administrative reforms, to win the public’s support.
A shift in the income taxation policy is especially favored by Japan’s younger generations, who have been among the hardest-hit by the recent economic problems, such as high unemployment rates and falling salaries.
In terms of the consumption tax, the report states, “(Hiking the tax rate to double digits) will become the basic condition in a review of the overall taxation system in the future.”
When the rate passes the 10 percent level — as it already does in many European nations — Japan will need to consider reducing sales tax rates on daily necessities, such as food.
The government must also consider levying inheritance taxes on a broader basis to maintain the social welfare system, the report said.
It also emphasizes the need to reduce the corporate tax in the future amid fierce global competition.
The report did not, however, come up with a clear proposal on decentralization of national tax revenues, which has been the focus of recent political debate.
The Tax Commission, whose views are considered closest to those of the Finance Ministry, compiles and presents medium-term tax policy proposals every three years.
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