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[December 08, 2006]

LEAD: LDP to debate consumption tax hike in late 2007+

(Japan Economic Newswire Via Thomson Dialog NewsEdge) TOKYO, Dec. 8_(Kyodo) _ (EDS: ADDING INFO)

The tax panel of the ruling Liberal Democratic Party decided Friday to debate in late 2007 whether the government should raise the consumption tax rate from the current 5 percent, LDP lawmakers said.

The LDP Research Commission on the Tax System will stipulate such a policy in a reform outline for the next fiscal year to be drawn up around Dec. 14, they said.

The LDP panel is expected to discuss the specific timing and margin of a consumption tax hike at the end of next year when the panel compiles a tax reform proposal for fiscal 2008.

With the decision, the LDP took a step forward toward the possible first consumption tax hike in over a decade. It contrasts with the government's tax panel which skipped any wordings of the consumption tax in its recommendations for tax reform for fiscal 2007 submitted to Prime Minister Shinzo Abe last Friday.

The Tax Commission, an advisory panel to Abe, apparently decided not to mention the consumption tax in its latest reform proposal, given Abe's pro-growth policy.

The government has already decided to shelve the consumption tax debate until next fall, fearing its negative impact on the House of Councillors election slated for next summer.

But the LDP tax panel concluded it should mention the consumption tax issue in its reform outline in view of prioritizing fiscal consolidation, the lawmakers said.

Yuji Tsushima, chairman of the LDP tax panel told reporters, "Most members agreed it is necessary to speak to the people in a frank and honest manner."

The LDP decision also effectively eliminated the possibility of a consumption tax hike next year.

"We need to recognize the severity of the fiscal situation and it is not enough for us to achieve a surplus in the primary balance," Nobutaka Machimura, who heads one of subgroups of the LDP tax panel, told reporters.

The government aims at achieving a surplus in the primary balance -- annual tax revenues minus outlays other than debt-servicing costs -- in fiscal 2011.

Machimura's remarks suggest the government will need to consider raising the consumption tax in the future to secure stable sources of tax revenue to cope with growing social security expenses and debt-servicing costs.

Of particular concern is how to secure revenue sources to finance the basic national pension program, since the share of tax revenues used for the program is to be raised in fiscal 2009.

It is widely speculated that the government plans to hike the consumption tax around April 2009, the beginning of the fiscal year.

Japan introduced the consumption tax in 1989 at a rate of 3 percent. The tax rate was raised to 5 percent in 1997.

Copyright 2006 Kyodo News International, Inc.

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