Rural Informal Taxation in China:Historical Evolution and an Analytic Framework

The present paper examines the historical evolution of China's rural taxation system from the pre-reform period to the late 1990s. We propose that because of information asymmetry between the upper-level and the lower-level governments, local governments had to be granted some informal tax autonomy to fulfill the upper-level policy mandates. This easily led to excessive local informal taxation on farmers. As market liberalization of the grain sector progressed, the low-cost tax instruments implemented through the traditional approach of implicit taxation gradually eroded. Local governments in agricultural regions had to resort to informal fees collected directly from individual rural households while the more industrialized regions shifted to non-agricultural taxes that are less costly in terms of tax collection. Hence, political tension between farmers and local governments in agriculture- based regions emerged and rural tax reform became necessary.