Rural tax and fee reform

In 1978, east China's Anhui Province became the first to adopt a contracted responsibility system with remuneration linked to output, heralding the nation's reform and opening. Coincidentally, five years ago Anhui became the starting place again for a new round of rural reform.

The path of reform has been beset with pitfalls created by unsynchronized political and economic restructuring. Since the mid-1990s, indiscriminate fines, charges and levies added to the farmers' load and sharpened the social contradictions in rural areas.

In 2000, Anhui began experimenting with rural tax and fee reform. A multitude of separate fees were merged into the agricultural tax and its surcharge. Tax revenue, along with that collected from commerce and industry, was used to run township governments, while the surcharge went to village-level organizations.

The consolidation and reduction of farmers' tax liabilities led to a drastic drop in grassroots governments' revenue, which in turn adversely affected investment in compulsory education. At the same time, transfer payments from the higher authorities could not subsidize all the financial shortfalls.

In April 2001, the central government decided to suspend dissemination of the Anhui method. To tackle the deep-seated problems exposed during the trial reform, a year later it promised to ensure a reduced and stable burden on farmers, normal operation of grassroots governments and abundant investment in rural compulsory education.

They soon realized that to achieve the three goals, both political and financial restructuring were necessary: rural tax and fee reform alone could not effect a permanent cure.

In July 2004, they proposed incremental reform. Levies and charges would first be standardized at substantially lower rates to lighten farmers' burdens, eventually phasing out agricultural taxes.

Many experts suggest that in tandem with the tax reform, the central government should absorb responsibility for compulsory education while enforcing the streamlining of the basic administrative structure and headcount.

Complications in coordinating reforms

Funding compulsory education has been a hard goal to make.

In August 2002, the nation adopted a policy making county governments responsible for subsidizing rural compulsory education, thus changing the past practice of relying excessively on money collected from the farmers.

But kicking the ball from farmer to village and town to county government does not tackle the source of the problem, since the farmers and villages are the roots that feed the plant. Heilongjiang Province, for example, scrapped its agricultural taxes last year, but it has been forced to lay off teachers and amalgamate village schools in hopes of cutting down educational costs.

According to the Ministry of Education, the average annual salary of China's primary and middle school teachers was 13,293 yuan (US$1,620) in 2003 and some 7 million teachers worked in rural areas. To have all rural teachers in China get paid, a total of 93.1 billion yuan (US$11.3 billion) is needed per year, or 6.2 percent of the total revenue on the central budget in 2004, amounting to 1.5 trillion yuan (US$181.2 billion).

It is even more difficult to reform the county and township financial systems, which are closely bound to officials' personal interests. It is entirely possible that administrative organs at these levels, whose existence has mainly relied upon agricultural taxes, will fall into an unprecedented financial predicament.

Performing a surgical operation to tackle the problem is easy, like downsizing management and laying off employees. Nonetheless, all seven nationwide structural reforms since 1949 have just been part of the endless circle of expand-streamline-expand. Lessons of history, plus deep-rooted interpersonal relations, have made people less than optimistic about the ongoing restructuring.

Enormous debts of grassroots governments

At present, a debt crisis has become the biggest block to deeper rural reform.

Optimistic estimates put the total debts of township and village governments now at 600 to 900 billion yuan (US$72.3 to 108.4 billion); other experts say it may well exceed 1 trillion yuan (US$120.5 billion).

The forming of this enormous debt took no more than a decade. Since 1994, when China began to introduce a system of sharing tax revenue between the central and local authorities, township governments have lost all sources of tax revenue except the agricultural, industrial and commercial taxes. But they are still responsible for costly expenditures on hygiene, social security, compulsory education and wage payment.

For example, to complete the national mission to "basically spread the nine-year compulsory education by 2000," many townships in Hubei and Henan didn't hesitate to borrow money to erect new classroom and dormitory buildings and update facilities for study. Answering another call of the country, some unrestrainedly took out high-interest loans to set up rural enterprises. Debt snowballed.

In fact, many grassroots cadres don't see any need to control the growth of debt. Showing off new facilities and institutions is an effective way to add to local officials' political achievements and consequently curry favor with their superiors. And they won't be the ones who have to repay the money.

But townships and villages that have had to try to break the debt chains have found that after auctioning off barren hills, they are at the end of their resources. It is unfair to expect the central government to take over this messy business.

Package rural reform plans to be implemented

China announced last October that as of the end of 2003, its urbanization rate hit 40.5 percent, with a rural population of 768.5 million. However, according to sources with the National Bureau of Statistics, in that year the rural population still accounted for 70.8 percent of the nation's total, or more than 900 million.

The error was made because in the original figure, millions of migrant workers were counted among the urban population, although they actually cannot register permanent residence in the cities where they live and work. The statistical inconsistency was created by the fact of separate administration in urban and rural areas.

Currently, although farmers constitute an overwhelming majority of the nation's population, the ratio of total agricultural output value to GDP has dropped to merely 14 percent. This issue is even harder to tackle than the agricultural tax.

Decreasing Proportion of Agricultural Output Value in GDP

(Source: the National Bureau of Statistics)

During the latter half of last year, 10 task forces dispatched by the central government investigated conditions at the grass roots. Based on their reports, within this year top policy makers are expected to work out long-term guidelines for overall rural reform.

Key points in rural reform

The new round of rural reform focuses on four main areas: farmers' income as related to rural taxes and fees, grain distribution system, rural land system, and social circumstances of migrant workers.

Farmers' income grew 6.8 percent last year, but growth still trailed that for city dwellers. The gap between town and country continues to widen. The income disparity between the urban and rural populations reached 3.2 to 1 in 2003, up from just 2.5 to 1 in 1998.

Since the hike in grain price in October 2003, grain security has become a popular topic of conversation. Last year, the nation continued reforming its grain distribution system, further relaxed controls over grain purchase and paved the way for a grain market makeover.

The Rural Land Contracting Law, which went into effect on May 1, 2003, has not substantially protected farmers' rights to contracted land, with some grassroots governments subcontracting collective land for profit. An unprecedented number of land disputes occurred last year, leading farmers whose rights had been violated to swamp higher authorities with petitions for intervention. Meanwhile, the plan for reform of land requisition was not announced last year as planned.

China has more than 150 million migrant workers. Although the problem concerning defaulted wage payments is being addressed, the 1958 residence registration ordinance that is still in effect divides people into agricultural and non-agricultural population by residence, preventing the migrant workers from receiving equal treatment. No big breakthroughs were made in the population registration system last year.

(Caijing magazine, translated by Shao Da for China.org.cn, March 14, 2005)