China: Rural Tax Reform Addresses Key Government Concerns
Apr 04, 2003
stratfor.biz
Summary
China will expand the scope of its rural tax reform program, currently in a trial phase, throughout the country this year. Prime Minister Wen Jiabao discussed the plan during a national teleconference on April 3. The reform is intended to address several key government concerns: reducing the rural-urban income gap, maintaining social stability amid economic changes following Beijing's entry into the World Trade Organization and, not the least important, tightening central control over regional and local governments.
Analysis
Speaking during an April 3 national teleconference with provincial leaders, new Chinese Prime Minister Wen Jiabao extolled the benefits of rural tax reform trials and said expanding the new tax regime nationally was a major reform to promote rural development. China has tried limited tests of a new tax system for the past few years. In that time, the "economic burden" of farmers in the test areas has been reduced by more than 30 percent.
The basis of rural tax reform has been to raise the overall national tax rate for farmers -- with the money paid more directly to the central government -- and to reduce or eliminate the numerous legal and illegal taxes and fees imposed by local and provincial governments. In doing so, Beijing can alleviate the economic strain on farmers -- thus promoting social stability at a time when World Trade Organization membership will start to affect them -- and, no less important, the government can gain closer control over local and regional officials and distribute tax money in ways more in keeping with national rather than regional or local priorities.
China's new leaders, like their immediate predecessors, face a very different set of challenges than did the revolutionary leaders half a century ago. China's economic reform and opening program has radically changed the financial and social situation within the country by raising the overall standard of living and increasing the competitiveness of Chinese industry, while at the same time triggering a wave of unemployment. Beijing's WTO entry offers new hopes of international economic and political influence, but it also threatens social upheaval as the massive rural population finds its livelihood threatened by free market principles -- no matter how selectively applied.
And years, if not decades, of entrenched corruption and nepotism have built up a cynicism toward the government and Communist Party, while slowly stripping the central government of true control over the vast nation.
Addressing these underlying problems is a vital priority for the government, since future goals of regional and even global influence and power are at the mercy of social instability and domestic unrest.
For Beijing, rural tax reform tackles several problems simultaneously, and thus far at little cost. The ratio between urban and rural earnings stands at a semi-official 3:1 right now, though even top government officials admit the gap is likely much wider. And while China actually faces deflation, rather than inflation, prices for some commodities are rising. Adding to the problems for farmers are China's obligations under the WTO, which will make domestic produce less competitive than it has been in the past, driving farmers deeper into poverty or out of work entirely.
This is the source of one of Beijing's biggest fears: disgruntled rural masses rising up revolution-style against a government that is controlled, or at least strongly influenced, by foreign economic interests. While China could simply try to suppress such instability through force, that act in itself would undermine international confidence in the Chinese leadership and economy, causing financial and political aftershocks that would be similar to allowing farmers to rampage.
Thus, one of Beijing's top priorities is to find a way to appease farmers and other rural laborers without having too obviously turned its back on WTO regulations. The rural tax reform is one key in doing this: It puts more money in the hands of farmers by reducing the overall tax and fee burden. Combined with national reductions in electricity prices and the opening of selected cities to some rural laborers, Beijing is trying to mitigate the ongoing economic disparities and to limit the fallout from WTO membership.
At the same time, the new regulations allow Beijing to rein in local and provincial politicians, who were using their own imposed fees and taxes to pad their salaries. By paying centralized taxes, the ability of local politicians to extort is seriously reduced, and they become much more reliant on the good graces of Beijing. This is being combined with a program of bureaucracy streamlining -- reducing the total number of government and Party officials at the lower and middle levels. This is designed not only to reduce corruption, but also to mend the rifts between the rural populace and the Communist Party officials.
A final benefit of the tax reform is that Beijing can better handle the distribution of tax revenues. Rather than leaving most of the money in the hands of local or provincial leaders, the central government will collect, consolidate and dole out monies to better fit national priorities. In effect, the government can collect and distribute China's wealth along the principle of "from each according to his means, to each according to his needs."
While rural tax reform has had some successes thus far, and will be implemented on a much broader scale this year, it will not solve all of China's problems. Regional economic disparities, displaced rural workers and high levels of localized urban unemployment remain symptoms of China's economic reform and opening programs. But Beijing is slowly addressing these issues, and it is clear that the more China heads toward a "socialist market economy," the more centralized political and economic power will become. Without this, Beijing fears it will not be able to contain the social upheaval caused by economic changes. |
