Japan’s Lower House OKs Tax Reform : Measure, Now in Upper House, Could Boost Consumer Spending

The lower house of the Japanese Parliament on Wednesday approved a sweeping package of tax reforms--including a 3% tax on consumption--on which Prime Minister Noboru Takeshita has staked his political future.

The action lifted the controversial reforms--which will reduce total tax revenues--over their biggest hurdle in a struggle of nearly four months to enact the first major change in Japan’s tax system since a 1949 reform under the U.S. postwar occupation.

Upper house deliberation on the bills is to begin today. Although more opposition resistance is anticipated, final approval is expected by the end of December. The reforms are to take effect April 1.

The 3% consumption tax, a form of value-added tax, would affect nearly all transactions other than at the retail level and would raise consumer prices slightly, officials said. But economists predict that the entire tax reform package will have a positive effect on consumer spending, a major prop of a new spurt in domestic demand that has helped Japan cut its reliance on exports for economic growth.

Cuts in direct taxes--personal and corporate income taxes and the inheritance tax--under the reforms would total $19.2 billion more than the revenue from the new indirect consumption tax, according to the Finance Ministry.

Economists and officials supporting the new indirect tax say Japan needs it to create a larger tax base in preparation for higher social security costs in an aging society. And they argue that direct taxes, which now account for more than two out of every three tax dollars, have reached the limit of taxpayers’ political tolerance.

Passage in the lower house came after an all-night bargaining session between Takeshita’s ruling Liberal Democratic Party and two middle-of-the-road opposition groups, the neo-Buddhist Komei (Clean Government) Party and the Democratic Socialist Party.

Stock Scandal Probe

The two moderate parties voted against the bills. The Socialist Party, Japan’s No. 1 opposition party, and the Communists boycotted the balloting. Members of the ruling party passed the bills in a standing vote that was not counted.

To persuade the two moderate opposition parties to attend the session and participate in the voting, Takeshita’s party agreed to set up a special committee to continue investigations of a stock scandal and to summon three key figures to testify.

The prime minister sought participation of the two opposition parties in the vote to avoid charges of “tyranny of the majority” that are traditionally leveled against any unilateral ruling party action in consensus-minded Japan.

The Liberal Democrats also released a list of 159 cases in which Recruit Cosmos, a real estate developer, distributed its unlisted shares to selected individuals and companies. Included were the names of aides and relatives of 16 members of Parliament, who made windfall profits by selling the shares after prices soared when they were listed on the over-the-counter market.

The names of the individuals and companies involved in 129 of the transactions were kept secret, on the grounds that they were not involved in politics.

An aide of former Prime Minister Yasuhiro Nakasone was newly listed as having received Recruit Cosmos stocks in 1986 when Nakasone was still prime minister. Previously, two other Nakasone aides had been named in the case. The newly revealed transaction brought the known tax-free windfall gains of the three Nakasone aides to an estimated $884,800.

Earlier disclosures showed that aides and relatives of nine Nakasone Cabinet ministers were included in the stock dealings--which were legal, though politically embarrassing. Among them are the three leading figures of Takeshita’s administration--Takeshita himself, Finance Minister Kiichi Miyazawa, and Shintaro Abe, secretary-general of the ruling party.

The Recruit revelations seriously undermined Takeshita’s argument that his reforms are designed to eliminate inequities in the tax system.

As a result of the Recruit revelations, the tax bills were amended to impose taxes on profits from sales of stock shares distributed to selected individuals before public listing.