Analysis of the Impact of the Rural Tax and Fee Reform on Grassroots Political Power

In order to fundamentally reduce the burden on farmers, increase farmers' income, maintain the long-term stability of rural society, and promote the comprehensive development of the rural economy, in March 2000 the Party Central Committee and the State Council decided to launch the rural fee-to-tax reform work in Anhui Province as a whole, and required nine major agricultural provinces and autonomous regions to select a number of counties and cities for pilot trials, and then gradually extend it nationwide. Anhui Province began piloting the rural tax and fee reform in 2000, and one year later the rural tax and fee reform was universally implemented across the country. The rural tax and fee reform has been hailed as the third major transformation of rural China since the land reform and the implementation of the household contract responsibility system. While the rural tax and fee reform reduced the burden on farmers, it also caused some negative impacts on the operation of grassroots political power.

I. The Impact of the Rural Tax and Fee Reform on Grassroots Political Power

1. Township government finances fell into difficulty

Before the abolition of the agricultural tax, township fiscal revenue mainly consisted of industrial and commercial taxes, agricultural taxes and township pooled funds, and, as the system at the time was not standardized, the government also strengthened its fiscal revenue through various fees. After the rural tax and fee reform, arbitrary charges, arbitrary fund-raising and arbitrary apportionment in rural areas were effectively curbed, and the burden on farmers was reduced, but at the same time township fiscal revenue fell substantially, especially for counties and townships that were economically underdeveloped and had agriculture as their main industry. After the abolition of the agricultural tax, which accounted for almost 70% of total township fiscal revenue, the operation and management of township finances encountered unprecedented difficulties.

Before the tax and fee reform, an important source of township fiscal revenue was the township pooled funds. The tax and fee reform abolished the five items of "township pooled fund" revenue, but the corresponding expenditure items were not abolished; instead they were shifted to the finances of the county and township levels. Financial investment in rural compulsory education was mainly "county-led", with the central government supporting its development through transfer payments; militia training expenditure was arranged by the county-level fiscal budget; family planning and preferential treatment expenditure were arranged by the township-level fiscal budget; and the costs of rural road construction and maintenance were no longer collected from farmers on a fixed basis, but resolved by village meetings through democratic consultation. The reduction in fiscal revenue did not reduce expenditure, which intensified the pressure on township finances that were already insufficient. Taking Guangdong Province as an example, according to data from the provincial tax reform office, after the tax and fee reform the fiscal revenue-expenditure gap of towns and villages was 3.853 billion yuan; apart from provincial fiscal transfer payments and special subsidies from prefecture-level cities, 1.5 billion yuan would still have to be absorbed by township finances themselves, and most towns in the Pearl River Delta would have to bear it entirely on their own. Regarding this, many town and village cadres were deeply worried and pessimistic about the future. 159 town cadres (68.5%) believed that after the reform the operation of the town government would be more difficult than before the reform. [1]P11

Our field research basically coincides with this. Because township pooled fund revenue was abolished, fiscal tightening led to difficulties in township operation. Yangjia Town is an agricultural town in Leizhou City, Guangdong Province, with a backward economy; in 2003 the per capita annual income of farmers was only 1685 yuan. After the implementation of the rural tax and fee reform in the second half of 2003, because town- and village-level pooled funds were abolished and the agricultural tax collection standard was lowered, the work at the town and village levels was noticeably affected. Before the tax and fee reform, Yangjia Town each year pooled from the people 600,000 yuan for rural cadre salaries, 300,000 yuan for water conservancy construction, 200,000 yuan for road maintenance, 100,000 yuan for soldiers' preferential benefits and obligations, 100,000 yuan for the five-guarantee fund, and 100,000 yuan for office meeting expenses; in addition, it collected more than 200,000 yuan in social support fees from people for children born outside the plan. Its disposable financial resources for one year were about 1.7 million yuan, basically enough to maintain the normal conduct of the town government's various work. After the tax reform abolished town-level pooled funds, the town government's only disposable funds this year were 200,000 yuan in social support fees for children born outside the plan, plus 4000 yuan in office expenses allocated monthly by the Leizhou City government. Town-level revenue shrank greatly, but expenditure items remained the same, and the normal operation of the town government was threatened. Ordinarily it could not even maintain office telephones, fuel for official vehicle maintenance, daily office expenses, receptions, or newspaper and periodical expenses. Yangjia Town now could only barely get by on the 4000 yuan in office expenses allocated each month by the Leizhou City government. The town government's monthly office telephone bill was about 1400 yuan, canteen subsidies more than 1000 yuan, and electricity several hundred yuan; two cars went to the countryside year-round, with fuel costs of no less than 100 yuan per car per day, in addition to other normal office expenses. To maintain normal operation, the government had no choice but to let some cadres take out loans in their personal names to "tide it over". The town mayor said: "The banks and credit unions stopped believing our government long ago. Interest alone is 80,000 to 90,000 yuan a year. As soon as there is money in the government account, the credit union promptly transfers it away. Having leading cadres borrow according to rank and amount is truly a last resort." According to leaders of the Leizhou City research office, all 18 township governments and 1 subdistrict office in the city were trapped by money and struggled to operate; failure to pay electricity and telephone bills was very common, and power and telephone cuts occurred from time to time.

2. Heavy township debts and a greatly weakened repayment capacity.

Generally speaking, local governments are not allowed to run fiscal deficits or borrow debt, but in fact many local governments have incurred large fiscal deficits for various reasons. The causes of township debt are diverse: debts owed by townships for establishing township and village enterprises, liabilities from building rural infrastructure, liabilities from improving educational conditions by building teaching buildings, and so on, with the largest reaching more than 10 million yuan and the smallest more than 1 million yuan. A survey in Guangdong Province showed that there were 184 towns with net debt, accounting for 79.3% of surveyed towns; among them 119 towns had net debt of more than 5 million yuan, accounting for 51.3%; only 48 towns had no net debt, accounting for only 20.7%. There were 200 villages with net debt, accounting for 78.1% of surveyed villages; among them 68 villages had net debt of more than 100,000 yuan, accounting for 26.6% of surveyed villages; only 56 villages had no net debt, accounting for only 21.9%. [1]P12 After our investigation in Leizhou City, Guangdong Province, we also found that this was a common phenomenon. Longmen Town's conditions ranked among the best of all townships in Leizhou City, but this township of 70,000 people still owed more than 20 million yuan in debt, of which only a few tens of thousands had been repaid so far, and the court had seized several million yuan in assets. The town party secretary said that although debts were piled high, because the original office building had long been a dangerous structure and had been sealed off, they gritted their teeth and found money everywhere to build a new office building. The new office building had only been completed for two months and cost more than 1.3 million yuan in total; they still owed 400,000 yuan, and this money was all obtained by "running to the ministries and advancing". Now it was the end of the year again, and every year at this time he felt miserable. Creditors came to demand repayment all year round, and as soon as the year-end approached they made a fierce fuss; the town leaders like them had to dodge creditors everywhere, not daring to go home or return to their units, and also had to keep changing their phone numbers and let only the office staff know, as if this were a private debt. They were almost every year intimidated by the underworld, and their families lived in constant fear because of this. In recent years contractors had all blocked the town family planning office building with mud; thinking about it, they had it hard too, but we really had no money to repay, so we had no choice but to let them sue in court. As soon as they sued, we lost; the court had already sealed our accounts many times, though in fact our accounts had no money year-round. Yangjia Town in Leizhou City currently owed more than 7 million yuan in various debts, including more than 3 million yuan for road construction, more than 1.5 million yuan for compensation for the Yangjia red brick factory, more than 800,000 yuan for school construction, and more than 600,000 yuan in borrowed office funds. Now that town-level pooled funds had been abolished, the town government no longer had repayment capacity, and the debt burden was heavy. To maintain normal operation, the town government had to continue borrowing, and the debt accumulated more and more. Yingli Town, with better economic conditions, also owed several million yuan. Most towns with poorer economic conditions owed more than 30 million yuan, and cadres generally reported that there was no way to resolve it in the short term.

Township debt was formed through rolling accumulation over the years. Local economic development was slow, and successive leaders of townships in Leizhou City basically borrowed money to maintain the normal operation of the government. After the rural tax and fee reform, the grassroots government's own financial resources declined, and transfer payments were not enough to fully make up for the reduction in revenue, so township governments found it hard to repay old debts and added new ones, falling into difficulty. Many grassroots cadres expressed pessimism about resolving township debt. In the Guangdong Province survey, 160 town cadres (79.6%) believed that after the reform their town was unable to resolve its debts; that is, 80% believed township debt was very difficult to solve.

3. The fiscal predicament after the tax and fee reform reduced township governments' ability to supply public goods to a certain extent.

So-called rural public goods refer to public-welfare goods or services provided within the rural scope for farmers, rural areas and agricultural production. They mainly include rural infrastructure, rural compulsory education, family planning, public security services, and so on. Since the founding of the People's Republic of China, our country has implemented a development strategy centered on cities. Public goods such as basic education, infrastructure, medical care and health enjoyed by urban residents were arranged through fiscal budgets, while the shortage of rural public goods was left for farmers to solve themselves. This was mainly solved through the state granting policy - the "three deductions and five pooled funds" system - which authorized township governments to pool across the whole township the funds needed for five public undertakings within their administrative jurisdiction, including family planning, compulsory education, preferential treatment, and militia training. After the rural tax and fee reform, the fiscal revenue of many townships fell sharply. Although there were state fiscal transfer payments, these could not close the township fiscal gap. In fact, apart from the economically developed coastal areas, which had certain financial resources to support the supply of rural public goods after the tax and fee reform, townships elsewhere, being economically backward, found it very difficult to provide the necessary public goods for farmers and rural areas.

Taking Leizhou City, Guangdong Province, as an example, because town-level pooled funds were abolished, township governments no longer had the financial resources to solve some practical difficulties for the masses. According to the mayor of Yangjia Town, previously the government invested more than 600,000 yuan each year in rural water conservancy, road construction and maintenance, and solving various difficulties of the masses. Now public welfare undertakings such as roads and water conservancy had to raise funds through one-case-one-discussion, but these projects cost tens of thousands or hundreds of thousands at every turn, and after the tax and fee reform fees could only be collected from farmers through one-case-one-discussion, and each person could not pay more than 15 yuan per year, which basically could not solve the funding problem. After research, the Leizhou City CPPCC found that because one-case-one-discussion had not yet been perfected and standardized in the implementation process, funds often could not be collected in full or at all, and even if collected they could not solve the funds needed for large projects. Many water conservancy facilities and road constructions required investments of millions or tens of millions at every turn; if not built, serious hidden dangers existed, endangering farmers' lives and property. For example, the Tiaonan sea dike, Leigao sea dike and Jijia Beizai sea dike were not projects under the charge of the water conservancy department, received no allocations from above, and long relied on town and village pooled funds for construction and maintenance. In the past, when sand-mud dikes were built, they collapsed as soon as typhoons and sea tides came, directly damaging 100,000 mu of farmland and shrimp ponds and affecting more than 80,000 farmers. If concrete revetment protective sea dikes to resist typhoons and sea tides were to be built, each project would require more than 10 million yuan. The leaders of Longmen Town said that Longmen Town did not dare to start its supporting projects now and would wait until money was found. The projects Longmen Town recently carried out all started only after the money was obtained. Here family planning and funeral reform work had once been given yellow cards; these two tasks were subject to a "one-vote veto" for the top leader, so the town had to find ways to raise funds to do them. The funding for family planning work in the previous six years was zero. This year the higher level said it would give 18,000 yuan, but so far not a cent had been seen. To provide some services for farmers, the only way was to borrow money.

II. Paths to Solving the Problems of Grassroots Political Power

1. Reform the township fiscal system and increase the intensity of transfer payments

The 1994 tax-sharing system drew upward the financial resources of local governments below the provincial level, raised the degree of central fiscal concentration, and strengthened the central government's capacity for macro-control. But it also produced negative effects in two respects: first, local fiscal capacity shrank; second, local governments' fiscal power and administrative responsibilities were severely asymmetrical. After the rural tax and fee reform, township finances fell even deeper into difficulty. To ensure that the rural tax and fee reform advances smoothly and steadily, these two negative effects of the tax-sharing system must be eliminated.

First, open up new tax sources, redistribute existing tax sources, and improve townships' capacity for self-support. Since the rural tax and fee reform, many township finances in our country have encountered difficulties, and quite a few townships have even run huge fiscal deficits and debts. One very important reason is that some rural townships have a single source of revenue and poor self-support capacity. These areas have a weak rural economic base and a low degree of marketization; they have neither high-value-added, high-tax-profit agricultural product production and processing enterprises nor other industry, and agricultural tax and fee revenue has become the pillar of these townships' finances. Agricultural tax reduction and exemption inevitably hit local finances, causing fiscal revenue to fall into difficulty. Therefore, after the rural tax and fee reform, the most fundamental way for township finances to escape difficulty is to vigorously develop the local economy, base themselves on local advantages and resource advantages, take the market as the guide, adjust and optimize the rural industrial structure, accelerate the process of agricultural industrialization and modernization, and provide a stable source of revenue for public finances.

To solve the local fiscal crisis, in addition to transfer payments from the central and provincial governments, an important aspect is to redistribute tax sources and provide a relatively stable source for township finances. Because after the implementation of the tax-sharing system, the state also handed over most of the business tax and personal income tax revenue to provincial and central finances. It can be said that the tax-sharing reform considered only how to increase central fiscal revenue, and did not consider how to set up main tax categories that meet the requirements of local taxes, placing the main sources of township finance on industrial and commercial taxes and agricultural taxes, thus creating a systemic crisis in township finances. After the rural tax and fee reform, can the state give townships a larger share in tax distribution and at the same time open some new tax categories in townships, for example letting real estate tax, with a relatively stable tax base, and resource tax in areas rich in natural resources evolve into main tax categories, so that township finances become a truly first-level local finance?

Second, increase the intensity of transfer payments and ensure a relative balance between local governments' fiscal power and administrative responsibilities. According to Articles 59 and 61 of the Organic Law of the Local People's Congresses and Local People's Governments of the People's Republic of China, local people's governments at or above the county level exercise the following functions and powers: ... (5) implement the plans and budgets for national economic and social development, and manage administrative work in the administrative region such as the economy, education, science, culture, health, sports, environmental and resource protection, urban and rural construction, finance, civil affairs, public security, ethnic affairs, judicial administration, supervision, and family planning; ... The people's governments of townships, ethnic townships and towns exercise the following functions and powers: ... (2) implement the plans and budgets for economic and social development within their administrative regions, and manage administrative work in the administrative region such as the economy, education, science, culture, health, sports, finance, civil affairs, public security, judicial administration, and family planning; ... That is to say, the functions of county and township governments basically cover every aspect of rural social life. Among these functions, some cannot be completed by grassroots governments, such as rural compulsory education and investment in agricultural science and technology. From the perspective of government governance, it is a pure public good whose scope covers the whole country; from the perspective of law, it is an obligation of the state, not an obligation of the grassroots government. For these affairs, the state should, in accordance with the principle of public finance, further adjust the structure of fiscal expenditure and increase the proportion of expenditure on public goods and services. Taking compulsory education as an example, the common practice in countries around the world is for the state to treat all school-age children without discrimination, so that everyone can fairly and without discrimination allocate educational resources and use existing educational facilities. In our country, before the tax and fee reform, rural compulsory education became one of the most important responsibilities of local grassroots governments, which was obviously inconsistent with the practice of countries around the world. After the tax and fee reform, we established a "county-led" fiscal investment system, mainly emphasizing ensuring the realization of rural children's right to compulsory education through transfer payments. This is a manifestation of the relative balance between fiscal power and administrative responsibilities. For other functions of grassroots governments, if the state wants to ensure their realization, it must grant them fiscal power, because functions to some extent mean fiscal power, and only when fiscal power and administrative responsibilities are relatively balanced can grassroots political power operate normally and can incidents of the "three arbitraries" that harm farmers be avoided from happening again.

Finally, reform the management method of township finances. From the current situation, many township finances are quite difficult, accompanied by chaotic fiscal management systems. Because townships lack the necessary fiscal supervision mechanisms and expenditures also lack budget constraints, the use of fiscal funds is highly arbitrary, which is also an important cause of the grassroots fiscal predicament. For the management method of township finances, three institutional models can currently be explored: (1) a relatively standardized township public finance system. This model is mainly implemented in townships that are relatively economically developed, have a large scale of fiscal revenue, and whose fiscal growth can meet their own expenditure needs. (2) A revenue-expenditure lump-sum contract township fiscal system based on the tax-sharing system. This model is mainly implemented in townships with relatively good economic conditions, a certain fiscal scale, and a small revenue-expenditure gap. (3) A fiscal system in which township finances are managed on behalf of the county. For townships that are economically underdeveloped and have a relatively small scale of fiscal revenue, the method of centralized treasury receipt and payment management can be followed, with their fiscal revenue directly handed over to the county treasury and fiscal expenditure arranged in an overall way by the county finance, so as to guarantee their reasonable expenditure needs and avoid the phenomenon of townships directly reaching into farmers' pockets to meet expenditure needs. For the management method of finances in most counties and townships, the central spirit should still be followed and the reforms of "province directly managing counties" and "township finances used by townships and managed by counties" should be actively advanced.

2. Deepen the reform of township institutions

With the advancement of the tax and fee reform, the reform of township institutions became another focus of China's rural reform. Scholars hold different views on the reform of township institutions. Some scholars believe that township governments should be abolished and turned into dispatched agencies of county-level governments; other scholars believe in implementing township autonomy. Whatever the direction of the reform, there is one problem that must be faced, namely the current situation of numerous township institutions and overstaffing. Before the tax and fee reform, our country had about 48,000 township governments, with about 200-300 staff of various types. According to incomplete statistics, the number of people at the township level who needed farmers to support them was about 13.162 million, meaning that on average every 68 farmers had to support one cadre, and the bloated institutions imposed an extra burden of about 40% on farmers. Therefore, to consolidate the achievements of the tax and fee reform, the reform of township institutions must be advanced.

First, merge the original townships and reform township institutions. The original townships were too small in scale, yet the number of people supported by public finances did not shrink because the township scale was too small; it could be described as small in size but complete in structure. Too many personnel inevitably led to an increase in the state's administrative costs. Under the original system, to solve the cost problem, the only option was arbitrary charges, arbitrary fund-raising and arbitrary apportionment under various names. To reduce the cost of state administrative governance, put an end to the "three arbitraries", and protect farmers' interests, merging townships and reforming township institutions is a good choice. For example, Guangdong Province proposed that the proportion of integrated townships across the province should reach more than 15%. At the same time, Guangdong Province also required the abolition of institutions set up in violation of regulations, the verification of town-level staffing in accordance with the requirements of transforming government functions, and, as of June 30, 2003, a freeze on town-level staffing, with resolute dismissal of overstaffed personnel and those who entered town-level staffing in violation of regulations. Overly numerous and scattered public institutions should be merged, and town-level public institutions with mature conditions should be encouraged to become enterprises and move toward the market.

Second, clarify the functions of township governments and change the governance method. According to Article 61 of the Organic Law of the Local People's Congresses and Local People's Governments of the People's Republic of China, the people's governments of townships, ethnic townships and towns exercise the following functions and powers: (2) implement the plans and budgets for economic and social development within their administrative regions, and manage administrative work in the administrative region such as the economy, education, science, culture, health, sports, finance, civil affairs, public security, judicial administration, and family planning; that is to say, the functions of township governments cover every aspect of rural life. But in reality, township governments are unable to realize the above functions. To realize these aspects, one important condition is to greatly increase the number of staff, which would return to the old path of township development before the tax and fee reform. In this regard, we should clarify the functions of township governments, which are mainly to assist the central government in providing part of rural public goods, or, in other words, public goods whose direct provision by the central government would be relatively costly, including public security, local transportation, information, family planning, and so on. Meanwhile, compulsory education, rural medical insurance, investment in agricultural science and technology, and so on fall within the scope of central government provision. For example, before the tax reform, because central funding input was relatively small, the rural compulsory education investment system was basically township-led, and the rural education surcharge and education fund-raising became the two major sources of education funds. To maintain the normal operation of education, grassroots departments had no choice but to keep charging farmers to run schools. For compulsory education funds, countries around the world basically provide them through the central government. It emphasizes that as long as they are eligible subjects, their rights are equal and undifferentiated; no one has privileges above the law, and no one can hold a superior position over others. At the same time, countries around the world also stipulate through legislation that a certain degree of schooling be provided free of charge to certain children. For example, Article 34 of the Italian Constitution (1947) provides that "schools shall be open to all. Primary education, which is obligatory and free, shall be given for at least eight years." Article 145 of the Constitution of the German Reich (Weimar Constitution) provides that "compulsory education shall be universal. The school term shall be at least eight school years, and thereafter until the completion of school at age 18. Tuition and educational materials in primary schools and completion schools shall be entirely free." From this it can be seen that developing rural compulsory education is neither a function of grassroots governments, nor do they have the capacity for it, and yet these aspects are often what farmers care about most. A survey by the Guangdong Province rural tax and fee reform investigation team showed that after the rural tax and fee reform, farmers' expectations for government functions were as follows: 62.1% of farming households hoped the government would do a good job in rural cooperative medical care and reduce farmers' medical expenses; 25.3% of farming households hoped the government would strictly supervise education fees and reduce farmers' education expenses; and 12.6% of farming households hoped for increased investment in rural infrastructure to improve rural living and production conditions. Yet medical care, education and other aspects are defined in our country's legislation and policy as functions of local governments, with relatively little central government input. Now is the time to change this.

After clarifying government functions, it is also necessary to change the traditional governance method and advance institutional reform. After the founding of the People's Republic of China, influenced by the administrative law of the former Soviet Union, our country promoted a "management" model opposed to that of Western countries. State organs enjoyed extensive management powers, and the scope of power intervention covered all areas of economic and social life. It was precisely this traditional omnipotent governance model that led to the daily increase of grassroots government organs and personnel, increasing the cost of government governance. Therefore, we must change this omnipotent approach and establish a service-oriented government. Township governments should serve farmers more through measures such as improving the investment environment, bringing in capital, technology and talent, providing information for farmers, and doing a good job in public security, rather than directly intervening in economic development, fees and taxes.