Monday, December 17, 2007

The LDP Kicks Tax Reform Down the Road, Easing Pressure on the Next Diet Session

I’ve been saying for some time that the regular session is the real deal and the time-limited tax measures will be the main battlegrounds. Here’s why.

During the regular Diet session, which typically begins in mid-January, the Japanese Cabinet submits most tax measures in the form of an omnibus bill to the Lower House, after the usual housekeeping matters have been taken care of and the Prime Minister and other members of his Cabinet have delivered their policy statement speeches and subjected themselves to questioning in the plenary. This year, the Diet opened on 25 January. The omnibus tax bill was submitted to the Lower House on 20 February and was adopted and forwarded to the Upper House on 6 March. For technical and parliamentary reasons*, this process is extremely difficult to accelerate. This alone means that the coalition cannot use the Lower House supermajority to override a hypothetical Upper House veto until late April or early May, a month after time-limited tax measures - consisting mostly of tax deductions, tax credits and lower tax rates - expire at the end of this fiscal year.

That would mean that for a month or more, real estate, stock and a large array of other transactions may have to be conducted while there is substantial uncertainty about their taxation consequences. For starters, many major transactions, such as the purchase of new housing, may have to be deferred and the financial markets could be in for some turbulence, depending on the depth and scope of the disagreements between the coalition and the opposition.

However, the 31 March expiration of the “temporarily” gasoline tax rates would have even more serious effects. First, unlike tax benefits, the extra gasoline tax must be collected from the consumer, at the pump. But because of the anonymous nature of the transactions, it would be impossible to work out an arrangement acceptable to both vendor and buyer that is contingent on the outcome of the omnibus tax bill. So, giving up the extra gasoline tax revenue during the hiatus appears to be the only workable solution.

However, this temporary boon to car users may cause another long delay. Because of technical reasons, the omnibus bill will have to be redrafted to avoid imposing the higher tax retroactively on gasoline sold during the hiatus. But that means that the supermajority cannot be applied, since it will no longer be the same bill that had passed the Lower House. More specifically, unless a duly amended omnibus bill can be passed in the Upper House with the acquiescence of at least some elements of the opposition and readopted in the Lower House, the coalition, at worst, would have to submit an amended omnibus bill in the Lower House** that eliminates this retroactivity, have it adopted there, send it to the Upper House, wait 60 days, then do the supermajority thing in the Lower House. The coalition could draft the omnibus bill in the first place to avoid such an outcome, but that in turn would give the opposition an incentive to refuse cooperation with the overall business of the Diet, this time with the blessing of substantial segments of the press. In this case, the coalition will look like the ones who are being unreasonable.

But does this mean that the DPJ has the LDP up a certain proverbial creek without a paddle? Not quite. Even if some elements of the media turn out to be sympathetic to at least parts of the DPJ agenda, holding the entire tax package ransom at virtual gunpoint without due cause will create serious responsibility issues for the DPJ as well. This is not the refueling resumption bill; you play around with the public’s wallets at own risk. It can hurt you more than it hurts them.

However, the LDP must also tread with care. It so happens that there is a substantial constituency against the extension of the elevated gasoline tax rate***, which the DPJ is keen to exploit. If the LDP mishandles public communications, it could end up as the one being blamed for any trouble that ensues. I suspect that the Ministry of Finance (as well as Prime Minister Fukuda) wants to use this as a legislative ju-jitsu trick, to keep the LDP road tribe from clawing back more of the revenue from the general budget to build even more roads and other related infrastructure. (Look, do you guys want to risk losing it all?)

I don’t have a good handle on how exactly this will work out. My hunch is that the two sides will work out a compromise, if only because of the enormous uncertainties surrounding the potential political risk, including where and on whom the consequences are likely to fall. But this does appear to be the issue that most bears watching to see how (and if) the “twisted” Diet works. And it’s hard enough to come to an agreement when the one most politically controversial item that you have happens to be the legally most complicated one. No wonder, then, that the LDP decided to kick tax reform down the road when it agreed on next year’s tax package.

* Drafting a legislative bill and submitting it to the Diet is incredibly difficult and time-consuming work, and an omnibus tax bill is no exception. The bureaucrats really do need that time, and the drafting team’s game clock can really start ticking only after the LDP has spoken. The Diet has long-established rituals and procedures, which you meddle with at your peril. Remember, that was one of the objections that the LDP raised against the DPJ bid to summon Fukushirō Nukaga and Akio Kyūma for sworn testimony. In 2005, the Diet opened on 20 January, and the omnibus bill was submitted on 16 February and passed on 2 March.

** By custom, a legislative item that has been rejected may not be taken up again in the same Diet session. This does not appear to have the force of law, but the coalition should be reluctant to break this long-established custom.

*** Urban car owners as well as businesses apparently do not appreciate the “temporary” measure.

Thanks, MTC, for the corrections to the footnotes.

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