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Gov't needs to tackle major issues in rural tax reform
The abolition of the agricultural tax, tax on special agricultural produce and tax on slaughtering animals is an important measure taken by the central government to promote agriculture and rural areas' development and increase farmers' income.
It is also a historically significant measure in promoting co-ordinated development between rural and urban areas and to build an all-around well-off society.
Theoretically, cancellation of the three taxes currently means a reduction of, and may potentially lead to an end to, government revenue from agriculture.
State and local finances should allocate revenue generated from the manufacturing and service sectors to feed agriculture and to satisfy the needs of rural public services, through revenue and resources re-allocation or transfer payment.
However, abolishing the three taxes will have huge impact on the rural grass-roots administrative organs, the supply and management of rural public services, as well as the existing fiscal relationship between the central and local governments.
The government will have to solve at least five major issues relating to rural tax system reform after abolishing the three taxes.
It appears that the three taxes are currently the rural public service's primary source of funding after the government finishes the "tax-for-fees" reform in the rural areas.
In other words, rural administrative organs and rural public services such as compulsory education depend on these taxes.
If there are no new tax sources, the finance department at the central, provincial and prefectural levels must step in to take responsibility for any shortage in funding after the government abolishes these three taxes.
The questions of whether the government can bear the cost or how the government will bear the cost must be answered.
Figures from the State Administration of Taxation suggest that revenue from the three taxes stood at 49.4 billion yuan (US$6 billion) in 2002.
It is estimated that such taxes could reach as high as 60 billion yuan (US$7.2 billion) in 2003.
The resulting pressure on the central and provincial finances (after abolishing the three taxes) will not be very big.
But according to a report by Xu Shanda, deputy director of the State Administration of Taxation, the government collected 177.9 billion yuan (US$21.4 billion) from farmers in 2000, of which only 33.5 billion yuan (US$4 billion) was in the form of the agricultural tax and taxes on special agricultural produce.
Figures from the office of rural "tax-for-fees" reform under the Ministry of Finance suggest that the agricultural tax accounted for about 25 per cent of the total burden for farmers between 1997 and 2001.
These figures suggest that it is fees, not the three taxes, that account for a majority of funding for rural public services.
With an aim to actually reduce farmers' financial burden, the central, provincial and prefectural finances will have to pay 160 billion to 180 billion yuan (US$19.3-21.7 billion) to meet the need for public services, three times that of three taxes.
The figure could be bigger when taking into consideration the increased demand for improvement of public services and payment of debts.
The government will have to conduct an all-around analysis on the financial capacity of the central, provincial and prefectural governments to avoid rapid expansion of government debt.
The central government needs to set a standard amount of funds needed for the rural public services.
It also needs to classify the payment responsibility for the different levels of finance.
Meanwhile, the central government should carry out different transfer payment policies for governments in different areas based on their economic performance.
Relative departments should have a good budget, so that the Ministry of Finance can take measures to avoid problems.
Costs for the cancellation of the three taxes will impact the current set-up of the rural grassroots administrative organs.
The more organs there are, the higher the cost the government will have to pay.
The government will have to work to consolidate and streamline the grass-roots organs, because they have a great impact on the stabilization of not only the rural areas but also the whole country.
For many years, people have held different views on the set-up of the tiers of the government and rural government organizations.
The present five-tier government organization, which includes the central, provincial, prefectural, county, and township, is too complicated.
These organs consume a large amount of money and increase burdens on taxpayers.
The layers should be reduced.
Management and supervision
Abolition of the three taxes and other fees from farmers means the central and local governments must supply funds for rural public products through transfer payments, a practice in which the central or provincial governments use part of its tax revenue from developed regions or areas with rich resources to subsidize local governments, especially those in poor areas.
As transfer payments are a "free lunch", the government will have to bolster management and supervision to improve the fund efficiency.
Otherwise, it will become a big financial burden for the central and provincial governments and create huge debts for government.
The government should strictly set the number of people for the administrative organs and set these people's payment standard.
A system to measure the achievements of the people in these organs and an accountability system should be established.
A system for ordinary people to supervise public servants should also be established.
Transfer payment system
After abolishing the three taxes, the central government will have to decide who will be responsible for the transfer payment.
For example, who will be responsible for supplying funds for rural compulsory education?
International practices suggest that a rural grassroots government should be responsible for that.
The central, provincial and prefectural governments should combine taxes from the developed areas and areas with rich resources and offer subsidies for providing public services such as compulsory education in underdeveloped areas.
Since China initiated the tax co-sharing (between the central and local governments) system reform in 1994, the finance transfer payment system was on-track towards becoming international practice.
However, establishment and improvement of the transfer payment system lags behind economic development and the economic system reform.
The government should take the opportunity of abolishing the three rural taxes to actively push forward transfer payment system reform.
Unified tax system
From a long-term point of view, the government needs to decide whether it wants to make rural areas tax free after it abolishes the three taxes.
China is a country with large disparity. Big gaps exist between different areas and different occupations. Rural people earning a high income should pay taxes. This is required by the tax law.
Presently, different views exist concerning the unification of the tax system in the rural and urban areas.
A unified tax system will also force the government to consider how to collect taxes such as value-added taxes and income taxes in rural areas. The government needs to do a lot of research to design a new tax system plan.