China's Repealed Agriculture Tax

January 03, 2006

Last week, China's move to repeal its agriculture tax made headlines around the world. Although many stories overdramatized the move by labeling the tax "ancient" and "2,600 years old"—the actual tax dates only to 1958—it's still a significant shift in tax policy for a nation bearing one-fifth of the world's population.

The repealed agriculture tax was similar to a modern property tax. It was a lump-sum fee paid by farmers based on the amount of cultivated land and number of family members. And as with property taxes, the tax was widely perceived as unfair, for two reasons.

First, the amount of tax was based on a proxy for grain production not income, forcing farmers to bear the same tax burden both in prosperous and lean years. Second, the tax devoured a large portion of farmer's incomes. While the average agricultural tax amounted to just $36 per family, that's a hefty tax bite given the annual per capita income of Chinese farmers of around $242 (nearly 15 percent).

Until recently, China has operated parallel tax systems for urban and rural taxpayers. One of the goals in repealing the agricultural tax to unify the tax system and simplify tax rules. It's hard to argue that it's isn't good tax policy. This, along with China's recent exemption of foreign and domestic investors from capital gains taxes, places the People's Republic of China closer to the cutting edge of economically sound tax policy than many avowedly capitalist nations.

Here's more on China's repealed agriculture tax, from the Chinese government's website:

Though the annual agricultural tax amounts to less than 300 yuan ($36.23) per family,an insignificant amount for urban residents, it is by no means a small amount for farmers whose annual per-capita income stands at only 2,000 yuan ($241.55).

China might be the only country in the world to levy a comparatively high agricultural tax on farmers,which currently stands at an average of 8.4 percent.

The agricultural tax includes a series of taxes levied on any collectives and individuals engaged in or obtaining incomes from farm production. Under the current system,any farming of land, no matter whether that land is barren or fertile,or the farmer rich or poor, is taxable because the land belongs to the country.

At present ,the income gap between farmers and urban residents is still widening. Statistics show that in 2003,farmers' annual per-capita net income was 2,622 yuan ($316.67) while the annual per-capita disposable income of urban residents was about 8,500 yuan ($1,026). The volume of the agricultural tax seems small, but it still means a lot to farmers and negatively impacts the consumption and production of the over-burdened farmers.

Currently the country has different tax systems for cities and rural areas.In cities, taxes are usually levied on net profits and not on costs. That means some costs are deducted before individuals or companies are taxed.For example, city dwellers only start to pay income tax when they earn more than 800 yuan ($96.7). But in rural areas, the levy of agriculture tax, for example, is based on grain production, no matter how much farmers have invested and how much they have earned.If the tax department sets a tax threshold for farmers as they do for city dwellers, most farmers won't need to pay taxes or would pay less.

Read the full story here. For our earlier post on China's broadened exemptions from capital gains taxes, see here.

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