Rural Tax Reform: Agricultural Productivity and Local Public Finance

Abstract

The paper assesses the impact of rural tax reform on agricultural productivity, rural incomes and local public finance in China using data covering 1997 Chinese counties and the period from 1999 to 2009 spanning the abolition of agricultural taxation in 2003. Using comparable later-reformed counties as controls, the abolition was shown to have increased agricultural productivity and rural incomes, but led county governments to reallocate land from the agricultural sector to industrial and commercial uses, which gives them extra-budgetary revenue to compensate for the budgetary loss. The abolition's impact on the agricultural productivity, rural-urban income gap and on the local governments resource allocation is likely to have influenced the migration and urbanization process in China.