Japan Approves a Tax Cut Plan; U.S. Lukewarm

In a bid to spur Japan’s recovery that drew only lukewarm praise from the United States, Parliament gave final approval Friday to a reform package that immediately slashes the income tax but later raises the sales tax.

The income tax cuts--$56 billion in 1995 and $36 billion for 1996 and subsequent years--are due to be roughly balanced starting from 1997 by increased taxes on purchases of goods and services.

The reduction in total taxes over the next two years is meant to accelerate a budding recovery, thereby increasing demand for foreign goods and reducing Japan’s huge trade surplus. A one-year 1994 tax cut of $56 billion was passed in March.

At the July summit of the Group of Seven leading industrial nations held in Italy, Prime Minister Tomiichi Murayama pledged to enact such a stimulus program by year’s end. The United States had pressed especially hard for Japan to implement tax cuts.

U.S. Ambassador Walter Mondale, in an interview after the shape of the plan was clear but before final legislative approval, described the tax package as “helpful.”

“But it’s not a very strong stimulative package,” he added. “We accept it. But they have been reluctant to use the fiscal stimulation tool the way the West would use it under similar circumstances.”

Mondale predicted the Japanese economy might possibly achieve 3% growth next year, but said this is far from certain.

The tax reform package’s handling of a 1997 sales tax increase is the result of a complex compromise among politicians and influential Finance Ministry bureaucrats. As of April, 1997, the tax on purchases of goods and services will jump to 5% from the current 3%.

The Finance Ministry, worried about balancing the government’s budget as Japan’s society becomes increasingly elderly, had argued that the sales, or consumption, tax should be hiked to 7% in 1997, if not sooner.

The reasoning was that in future decades, as a larger percentage of citizens are retired but continue to spend out of their savings, such a shift toward heavier consumption taxes rather than income taxes would help maintain government revenues.

When former Prime Minister Morihiro Hosokawa proposed a tax reform package along the lines of the Finance Ministry’s proposal in February, he was forced to back down after a rebellion over the sales tax hike from his coalition partners, the Socialists and the New Party Harbinger.

But Murayama, whose Socialist party had vowed to repeal the sales tax when it was in the opposition, announced his about-face in September, saying Japan needed a tax hike to pay for welfare in its rapidly aging society.

Now, the Socialists and New Party Harbinger are allied with the conservative Liberal Democratic Party in a new ruling coalition, and they have supported the smaller consumption tax hike. The upper house of Parliament gave final approval to the four-bill package Friday on a 151-85 vote.

Several thousand demonstrators marched through Tokyo’s government district Friday to protest the sales tax increase and Murayama’s decision as prime minister to overturn most of the Socialists’ leftist policies.

Times Staff Writer Sam Jameson in Tokyo contributed to this report.