While the government must slash its wasteful spending, taxes still need to be raised to support the aging society, the Tax Commission said Friday in its fiscal 2006 tax-reform proposals.

The commission recommended ending national and local income tax breaks in January 2007 and reiterated its support of several corporate tax cuts scheduled for March.

But it also hinted that more tax increases are in store.

"In the future, we must debate fundamental changes to the tax structure, including what the appropriate levels of taxes are for income, consumption and assets," says the report, submitted to Prime Minister Junichiro Koizumi.

And those talks of tax hikes may come as early as next week. The commission's proposals are the first big step in forming the fiscal 2006 tax package.

The Liberal Democratic Party's tax panel will use the proposals when they meet next week to compile their final report. Some members have said they also plan to add a proposal to raise tobacco taxes to pay for medical treatment for such diseases as lung cancer and diabetes.

"This report prepares the ground for fundamental tax reforms to come," said Commission Chair Hiromitsu Ishi, who is also an economics professor at Chuo University.

Debate is on hold about income and consumption tax hikes, and liquor and environmental taxes, he said, but "given Japan's fiscal debt, aging society and the lowest tax rates among developed nations, we just can't just keep running away from our problems."

The Tax Commission's report recommends the following:

Eliminate the so-called permanent 1999 income-tax breaks in January 2007. (The government has already decided to halve income tax breaks in January.)

Flatten local residential tax, starting in fiscal 2006. (Residential taxes are currently set at 5 percent, 10 percent or 13 percent, based on income.)

Put vehicle-related tax revenue earmarked for road construction and some of the other special-account revenue into the budget's general account to be used to cover other costs, including health care and medicine.

Expand taxable income on foreign residents who have been in Japan for less than five years. (Unlike long-term residents, short-term residents are not taxed on overseas income.)

Simplify the structure of liquor taxation.

Stop publishing the names of the nation's highest taxpayers.

These proposals represent only a modest raise in income and residential taxes for a typical single-income family.

Currently, an individual can claim a 20 percent tax break of up to 250,000 yen and get a residential-tax cut of 15 percent, up to a maximum 40,000 yen.

Looking at a typical household gives a clearer picture of how the tax changes would affect taxpayers.

A family of four living on a single income of 5 million yen a year now pays about 166,500 yen in annual income tax. Removing their tax exemption would increase their annual tax payments to 203,500 yen, an increase of 37,000 yen a year, or 3,083 yen per month.

But economists say the commission's recommendations are just a few of the tax increases expected to be implemented in the near future.

What worries the economists is that the Tax Commission did not specify in this year's report how much further taxes will rise beyond the next fiscal year.

In the past, tax panel members have recommended a double-digit consumption tax and reducing or scrapping exemptions for a nonworking spouse.

If these suggestions are implemented in addition to all of Friday's proposals, taxpayers would face a heavy burden, said Satoshi Shinohara, an economist at NLI Research Institute.

After the 1999 tax breaks are eliminated, residential taxes flattened and tax exemptions for nonworking spouses scrapped, then the family of four living on 5 million yen a year would be taxed 963,000 yen a year, up 180,000 yen, or 15,000 yen a month, from the 783,000 yen total paid in 2005.

However, that assumes the tax commission's suggestion to reduce income tax rates would be put into place. For the family of four, the rate would be reduced from the current 10 percent to 5 percent. If the rate is not reduced, and the current income tax exemptions are slashed by two-thirds, their annual tax would rise additionally from 180,000 yen to 360,000 yen, Shinohara said.

And taxpayers still face possible consumption tax hikes and increases in public health insurance premiums.

"The sooner the government spells out how much (overall) taxes need to go up per family, the better," Shinohara said. "As bad as the picture looks, it is the fear of unknown taxes in the future that is going to dampen consumer sentiment."

Tax Commission chief Ishi's comments last year that the nation's mounting debt naturally will require a larger tax burden for salaried workers have made him a target of attack.

The professor and his family have been bombarded with calls through the night and threatening faxes, according to one Finance Ministry official.