With Japan's economic recovery gaining momentum, the government appears set to increase taxes across a broad spectrum. The Tax Commission last week proposed a series of tax-code changes for fiscal 2006, including an abolition in 2007 of the flat-rate tax cuts for individual income taxes that had been introduced to shore up a flagging economy. The commission also called for eliminating special tax breaks for businesses, such as those designed to promote investment in information-technology (IT) projects.
The panel did not say whether the consumption tax would be raised, although it is almost certain that the question will be the central topic of the tax debate a year from now. The government must realize, however, that introducing a host of tax increases to reduce the budget deficit will smother the burgeoning economic recovery. It is also important not to reduce efforts to cut government spending.
The commission's silence on the value-added tax is like the calm before a storm. With a vigorous debate looming over the horizon, the panel probably wanted to skirt this explosive issue. A boost in the tax rate, now 5 percent, is considered unavoidable down the road. The sticky questions are when it should be raised and by how much.