An End to China Agriculture Tax

China's No. 1 Document of 2004 put the issue of farmers' incomes at the forefront of the policy agenda. The No. 1 Document of 2005 reaffirmed this priority.¹ The documents, jointly issued by the Communist Party Central Committee and the State Council, commit to deepening rural tax reform and reducing the financial burden on farmers. Not since the 1980s have rural problems been given such high priority. No. 1 Documents on rural work were put forth annually from 1982 to 1986. Even then, however, the emphasis was always on production. The No. 1 Document of 2004 was the first such document to focus on farmers' incomes.²

The centrepiece of the programme is the elimination of the agriculture tax over a five-year period. It follows efforts begun in the late 1990s to consolidate a plethora of rural taxes and fees into a single unified tax. Even with this consolidation, the revenue share of the agriculture tax in China's total fiscal budget remained small, just 1.7 per cent in 2003.³ At the township and village level, however, where it is easily administered and serves local spending needs, this tax plays a crucial role, especially in poor areas lacking other tax bases. Thus, elimination of the agriculture tax had to be tied to the institution of a centrally coordinated revenue sharing scheme and to shifts in responsibility for public service provision to higher levels of government. Otherwise, there would be no hope of restraining taxation and fees at the local level.

The decision to do away with the agriculture tax fits squarely into the "pro-people" policy orientation of the Hu-Wen government and is motivated by a variety of concerns.⁴ On equity grounds, those who occupy the bottom rung of China's economic ladder and who in relative terms have been slipping behind — farmers — will be the beneficiaries. On economic grounds, maintaining incentives to farm is of growing importance as farmers gain broader access to competing employment opportunities and farming becomes a more active choice. Moreover, on political grounds, widespread discontent in the rural areas is erupting into protests and threatening to undermine social stability.

Repeal of the tax is scheduled to be phased in nationwide over a five-year period through 2008. The more heavily agricultural provinces are to proceed most aggressively. Heilongjiang and Jilin forged the way, eliminating the tax completely in 2004. Another 11 provinces reduced the tax rate three percentage points from the existing ceiling of 8.4 per cent. These 13 spear-heading provinces are receiving full reimbursement by the central government for the loss in revenue. The remaining provinces must rely on internal funds to compensate sub-provincial levels of government as warranted, having been directed to reduce the tax rate by at least one percentage point in 2004.

In 2005, all poor counties — amounting to a quarter of the total nation-wide — are to see the tax completely eliminated. The central government has committed RMB50 billion for the year to reimbursements. As of early in the year, progress was faster than planned with 22 provinces already having eliminated the tax entirely.⁵

Indications are that the policy is having the desired effect. According to the People's Daily, "In 2004, increase in grain production has become the brightest colour in China's economic chart."⁶ The rise in grain output was 9.0 per cent, reversing a declining trend since 1999. Rural income per capita increased by 6.8 per cent, still lagging behind the urban growth rate of 7.7 per cent but at least narrowing the growth differential.⁷ Reduction in the agriculture tax is among the factors being credited for these achievements along with buoyancy in grain prices largely resulting from the state's restraints on market supplies.

Historic Shift in State-Peasant Relations

Elimination of the agriculture tax marks a fundamental reorientation of relations between the state and peasants. Throughout Chinese history, the main concern of the state with regard to the peasantry has been to extract revenue. In return, the state has...