Japan Democrats decide on quake tax hikes

Japan's ruling Democratic Party decided on Tuesday to raise taxes to fund reconstruction from the March earthquake and tsunami from next April as the country needs to secure funding without further straining its already weak public finances. The debt-ridden government needs a balancing act to pay for rebuilding in areas struck by the massive quake and tsunami that left about 20,000 people dead or presumed dead without choking off a fragile recovery.
The Democrats' decision was in line with government proposed tax hikes totalling 11.2 trillion yen ($146 billion), which called for a 4 percent increase in personal income tax to raise 5.5 trillion yen over 10 years. The Democrats decided to effectively scale back a planned corporate tax hike for three years from next April, which will be followed by a hike in the tobacco tax in October 2012, an increase in income taxes from January 2013 and residential tax increases from June 2014, its tax panel said in a statement.
"Taxation is needed for reconstruction," tax panel chief Hirohisa Fujii, a former finance minister, told reporters. He said Japan must bear in mind the fact that the country's public debt, which is twice the size of its $5 trillion economy, is worse than those in the United States and Europe.
"If that is reflected in government bond prices, interest rates would rise and that would hurt investors," The government has said it would spend 19 trillion over the next five years to pay for Japan's biggest rebuilding efforts since the aftermath of World War Two, of which 6 trillion has already been budgeted.
Based on the panel's decision, the ruling party will begin negotiations on the tax hikes with opposition parties, which control the upper house of parliament and can block bills. The government aims to submit to parliament a third extra budget, expected to top 11 trillion yen, for the current fiscal year to fund rebuilding next month.
A bulk of the third extra budget would be funded with reconstruction bonds, and extra tax revenues would be used to redeem the bonds over a period of about 10 years. To limit the tax burden, the government is aiming to tap non-tax revenues of 5 trillion by cutting other spending and selling stakes in Japan Tobacco Inc and unlisted Tokyo Metro to fund the cost of reconstruction.