Prime Minister Naoto Kan intends to raise the consumption tax temporarily to finance post-quake reconstruction measures.
Prime Minister Naoto Kan intends to raise the consumption tax temporarily to finance post-quake reconstruction measures.
A proposal to increase the 5-percent consumption tax by 1 to 3 percentage points for two to three years is being considered within the government, according to sources.
A 1-point increase would bring in an additional 2.5 trillion yen to government coffers a year.
The government plans not to issue government bonds for the first supplementary budget of about 4 trillion yen. But government bond issues are expected to be required for much larger subsequent extra budgets to pay for long-term reconstruction measures.
Kan intends to use the increased revenue from the consumption tax hike to redeem these bonds, the sources said. Other possibilities include increasing the income and corporate taxes.
But it is unclear whether the government will follow Kan's blueprint, the sources said.
Even within his ruling Democratic Party of Japan, some lawmakers are wary of raising the consumption tax for reconstruction.
The opposition Liberal Democratic Party has argued that government bonds should be issued for reconstruction, but it has not specified how the bonds might be redeemed.
A new advisory panel reporting to Kan on post-quake reconstruction, which will compile its first package of proposals in June, will discuss whether tax increases are necessary.
At the panel's first meeting Thursday, Chairman Makoto Iokibe, president of the National Defense Academy of Japan, proposed a "disaster reconstruction tax."
Iokibe said after the meeting: "We need to consider asking the entire nation to shoulder the funds required for reconstruction."
At a news conference Friday, Chief Cabinet Secretary Yukio Edano said: "The consensus is that large amounts of funds are necessary for reconstruction."
Referring to the tax proposed by Iokibe, Edano said the government would make a final decision after panel members had presented their recommendations.
Using the consumption tax as a means to finance reconstruction has some drawbacks. Consumers and businesses in the quake-hit areas would have to share increased burdens because of the difficulty in excluding specific areas from the increase.
Government officials are considering measures to deal with the problem, such as refunding a certain amount to those affected by the disaster, the sources said.
Some government officials said the government may maintain the increased consumption tax rate even after the reconstruction period and use the revenue for social security spending.
"If we raise the consumption tax rate, we have to ask taxpayers to shoulder burdens universally," said a senior government official. "But one advantage may be that it would be easy to shift to a type of welfare tax (once reconstruction is over)."
Increasing the income or corporate taxes would also present problems.
The income tax has six tax rates ranging from 5 percent to 40 percent. Even if all the tax rates were increased by a percentage point, total revenue would increase by only about 1 trillion yen.
Corporate tax revenues are unstable. For example, they fell about 50 percent following the global financial crisis that started in fall 2008. The expected total take for fiscal 2010 is a modest 7.4 trillion yen.