Tax Reform, Fiscal Revenues, and Farmers’ Income Evidence from Two Waves of Chinese Agricultural Tax

Abstract

This paper examines the effect of Chinese agricultural tax reform on local fiscal revenues as well as farmers’ income. Fixed effects results show that a tax rate reduction from 15.3 to 8.4 % in the first 5 years of the reform did not lead to a corresponding decrease in local fiscal revenues. At the same time, farmers’ income slightly decreased. In the second 5 years of the reform, the tax rate was reduced to zero. This time, local fiscal revenues decreased linearly with the tax cuts, and farmers’ income increased by 17.8 %. The link between the actual fiscal revenue reduction and farmers’ income suggests that merely changing the nominal level of taxation does not necessarily increase farmers’ income. Rather, the complete implementation of the reform relates crucially to curbing local governments’ unauthorized extractions.