The 1994 Tax Reform and Its Impact on China's Rural Fiscal Structure

Abstract

This article analyzes the fiscal crisis at the township level and the related worsening of the peasant burden that was predominantly caused by the 1994 tax reform. This reform changed the tax-sharing rules in favor of the central government. The pressure for performance under tighter fiscal constraints drove local officials to replicate the central government's "self-serving" policy and to desperately attempt to balance their budgets at the cost of their subordinate jurisdictions. Located at the bottom of the administrative hierarchy, the township had no subordinate governments to absorb its fiscal losses or contribute to its coffers. Diminished sources of revenue compelled township officials to squeeze the peasants even harder, particularly in the agricultural provinces. While the tax-for-fee reform and the repeal of the agricultural tax eliminated most of the burden on the peasants, the fundamental structural problem with rural finance not only still exists but also is getting worse.