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By Han Jun, Development Research Center of the State Council (DRC)

Research Report No 1, 2012

China began rural tax reform in 2000, popularized it in 2003 and concluded it in 2006. Within six short years, the country brought its 2600-year-long agricultural tax to a complete end. This was a major reform of epoch-making significance, which brought most real and most direct benefits to farmers. This sweeping reform, designed to fundamentally rectify rampant taxes and administrative charges in rural areas and alleviate farmers' burden, prompted public finance to fully cover agriculture, rural areas and farmers, triggered a major reform of rural social undertakings and public service supply mechanisms, became a breakthrough point for reforming the dual system that had separated urban and rural areas, and ushered in a new age for an integrated urban-rural economic and social development.

I. Heavy Burden for Farmers Originate from a Dual Urban-Rural Structure

Farmers' burden became increasingly heavy since the end of the 1980s. During this period, farmers' burden was mainly manifested in the following areas. One, all sorts of unreasonable fund raising, levies and administrative charges skyrocketed beyond the endurance of farmers. While the agricultural tax and fees collected from farmers for overall township planning and village reserve paid by each farmer were only 32.5 yuan and 65 yuan respectively, unreasonable fundraisings, levies and administrative charges were regarded by farmers as "bottomless pits" as these taxes and charges were levied under various pretexts through random collections. Two, the relative tax and fee burden varied widely between different regions and between farmers with different income levels. It was the heaviest for major grain-producing areas and for pure farmers and poor families. According to our 2001 field study of three counties in three central provinces, farmers with a per capita annual net income of 500 yuan or less than 1,000 yuan respectively had a per capita tax burden that was as high as 36.32% or 38.50% of their per capita net income.

The dual system that separated urban and rural areas was the fundamental cause of excessively high farmers' burden. On the one hand, this system enabled the government to excessively collect rural surplus funds through taxation and leave little accumulation for rural development. On the other, this system provided too little basic public products and services for rural areas through a fiscal arrangement in favor of urban areas. For long, rural public products were mainly provided by grass-roots governments and collective organizations or by farmers with their own raised funds, instead of being borne by public finance. The 1994 tax-sharing reform scored tangible achievements. But the fiscal system below the provincial level was not thoroughly reformed and the fiscal resources and administrative responsibilities were not symmetrically divided. As a result, the governments below the provincial level continued to centralize their fiscal resources and decentralize their administrative responsibilities. The spending burden was passed down from one level to another, and finally to town and township governments, which had no alternatives but to pass the burden eventually to farmers. This was why excessively heavy farmers' burden became a "chronic disease" hard to cure.

By the end of the 1990s, vicious incidents arising from farmers' burden increased year after year and excessively heavy farmers' burden became a major problem that adversely affected grass-roots cadre-mass relations and social stability. It was against this background that China began to reform its rural tax and fee system.

II. Rural Tax Reform Produces Decisive Impacts on Changing Dual Urban-Rural Structure

1. The reform evolved from taking less to taking none from farmers. The reform eliminated the dual urban-rural tax system and basically unified the tax system that applied both to agriculture, rural areas and farmers and to industry, commerce, cities and urban residents.

In all countries, either developed ones in Europe and America or developing ones such as India, agriculture-related taxes are all scattered in various tax types, which give equal treatment to agriculture and other industries on the basis of market rules. Farmers pay value-added tax for farm products they produce and sell and pay personal or corporate income tax for their incomes. The uniqueness of these tax policies is to offer most preferential treatment to agriculture. For long, China's tax system had remained a dual pattern: business tax for urban areas and agricultural tax for rural areas. In the early stage of rural tax reform, the main policy goal was to rectify rampant rural administrative charges and incorporate them into agricultural tax. The earliest plan for rural tax reform failed to define the abolition of agricultural tax as a policy goal. By 2004, the policy guidance for rural tax reform was guided by "alleviation, standardization and stabilization". In other words, all administrative charges were abolished and consolidated into unitary agricultural tax and the rate of agricultural tax was gradually lowered so as to alleviate farmers' burden. Agricultural tax was based on total land output in a normal year, which comprised both the commodity grain sold by farmers and also the ration grain and seeds kept by farmers. Agricultural tax was neither an income tax based on the net income of farmers engaged in agriculture, nor a goods tax based on the turnover of goods. In fact, it had degraded into a fixed land tax, or more accurately, a land rent. It was vague in nature and unscientific in design. After China began rural tax reform, the rate of agricultural tax was set at no more than 7% of the total land output in a normal year and the rate of surcharge was set at no more than 20% of the proper tax. Altogether, they were no more than 8.4% of the total land output in a normal year. This tax rate, actually implemented in most places, was unduly high and beyond the endurance of farmers when compared with the agricultural tax in China's history or with the tax burden of farmers in other countries. Our investigation findings in some counties in the central region indicated that 8.4% tax payment nearly extorted all surplus of grain production and made grain production totally unprofitable for farmers. This was a gross tax inequity between urban and rural areas. In essence, the dual tax system respectively for urban and rural areas is an institutional arrangement to exploit agriculture, rural areas and farmers in order to support cities, industry and urban residents. It was a major institutional source of excessively heavy burden for farmers. Therefore, these excessively heavy farmers' burden could be fundamentally solved only when all taxes exclusively targeted on farmers were abolished, when the thousand-year-long "imperial grain tax" was brought to an end, when farmers received equal tax treatment, and when a tax system applicable to all industries was introduced. When China got a deeper understanding of the defects of its dual tax system, rural tax reform soon entered into a stage of gradually reducing agricultural tax and finally abolishing agricultural tax altogether. In 2004 when Premier Wen Jiabao delivered the report on government work at the 2nd Session of the 10th National People's Congress, he announced for the first time in history that China would abolish agricultural tax in the next five years. By July 2005, a total of 28 provinces, autonomous regions and provincial level municipalities had decided to completely abolish agricultural tax. So the conditions were ripe for China to abolish agricultural tax ahead of schedule and hence the discriminatory dual tax system. After China began to abolish agricultural tax in 2006, the state did not immediately introduce personal income tax on farmers and value-added tax on farm products directly sold by farmers. The goal was to allow farmers to have a fairly long breath of relief. By so doing, China basically unified the tax status of agriculture and farmers with that of other industries and social groups, and fundamentally removed tax system constraint to farmer income growth and rural industrial development. Compared with other industries, agricultural is a vulnerary industry. And compared with urban residents, farmers are noted for poor self-development capacity. In order to protect and support agriculture, China should lessen agriculture-related tax burden for a considerable time to come within the framework of a unified urban-rural tax system.

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