Timing of sales tax hike unspecified

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Faced with a Lower House election that must come by September, the struggling Liberal Democratic Party-New Komeito ruling bloc said Friday the timing of a consumption tax hike will not be specified in its guideline for fiscal 2009 tax reforms.

The ruling coalition would only say the government will raise the 5 percent sales tax after the economy improves.

“After the economic situation improves, we will swiftly implement tax reforms that will include the consumption tax,” the guideline said. “We will establish a sustainable fiscal structure by the middle of the 2010s.”

In October, Prime Minister Taro Aso set out a timeline, saying he wants the consumption tax raised within three years. Critics thus hit the LDP tax plan for failing to reflect Aso’s plan.

But Aso stressed that his plan remains intact.

“This stance has not been changed,” Aso told reporters. “We will implement tax reforms that include the consumption tax hike from fiscal 2011.”

Yuji Tsushima, the LDP’s tax panel head, claimed the ruling bloc’s guideline is in line with Aso’s plan.

The guideline “does not go against” Aso’s policy, Tsushima told reporters. “We did not say (in the guideline) that it is impossible” to raise the consumption tax in three years, he added.

Hakuo Yanagisawa, another key LDP lawmaker involved in tax reform, also claimed the guideline doesn’t differ from Aso’s plan.

“This is not that different from the prime minister’s instruction,” he told reporters.

All of the consumption tax revenues should be used for social security benefits and countermeasures against the declining child population, the guideline says.

The ruling parties also pledged to consider the installation of “multiple rates” for the consumption tax, including low rates for daily necessities.

The coalition also said it will consider raising the tax burden of high-income earners, and reducing that of low- to middle-income earners.

The parties will also review the inheritance tax so the income disparity between the rich and poor will not be passed over to the next generation.

The ruling bloc said it will consider lowering effective corporate tax rates to strengthen Japan’s international competitiveness.

Environmentally friendly cars will be tax exempt or face lower levies, the guideline said.

Some economists said it was inevitable for the ruling bloc not to state when the consumption tax will be hiked, given the current political and economic crisis. Others said it symbolizes Aso’s lack of leadership.

“It is now difficult (for the ruling parties) to say when (the tax will be raised), while we still cannot foresee the extent to which the economy will worsen,” said Satoru Ogasawara, economist at Credit Suisse.

Specifying the timing of a tax raise would rather offset the positive effects of the latest economic stimulus package, which may include cash handouts to households in hopes of spurring spending, Ogasawara said.

“If the consumption tax is to be raised in two to three years, all (of the cash handouts) will not necessarily be consumed,” he said.

The pending Lower House election also hampered the ruling bloc when it came to clarifying the timing, Ogasawara argued.

Meanwhile, Hideki Hayashi, chief economist of Shinko Securities, said he can see little of Aso’s initiatives in the LDP tax reform plan.

“Not specifying (the timing) typically indicates that at present, Aso’s ability to lead his administration is severely weakening,” Hayashi said. “It shows Aso does not have a support base in the ruling bloc.

“Certainly, (the unspecified timing) shows Aso’s administration is on its last legs,” Hayashi said.