To finance swelling social security costs, the 5 percent consumption tax needs to be raised to around 10 percent in the middle of the next decade as more baby boomers become pensioners, according to an interim proposal by the Liberal Democratic Party's financial reform study group.
The proposal suggests calling the consumption tax a "social security tax" instead, to ensure that revenues from the levy are used for such costs.
By increasing transparency, the thinking goes, the public will regain trust in the country's pension and other social security systems.
The government said social security costs will rise to ¥141 trillion in fiscal 2025 from the current ¥90 trillion. The government plans to boost its contribution to the national pension program in fiscal 2009, requiring it to find sources of funding to cover the increased cost.
"Social security costs largely put pressure on finances," said LDP lawmaker Kaoru Yosano, who heads the group. "It is necessary to secure a stable revenue source."
The proposal came as the consumption tax debate is heating up. The government's Tax Commission called Tuesday for a hike, without mentioning the timing or scale, the first time in three years that it has mentioned a hike in its tax reform proposals.
Prime Minister Yasuo Fukuda, who has been fending off calls by the opposition camp to hold a general election, recently implied the tax will not be hiked next fiscal year.
A sales tax hike would be especially sensitive with voters. In 1997, when the consumption tax was increased from 3 percent to 5 percent, the government instead offered cuts in income taxes.
This proposal by the LDP's financial policy panel will be submitted to the LDP's tax panel, which is expected to compile its tax proposal around mid-December.