By using a panel data set covering 10 provinces in China from 1986 to 1999, we present
the stylized facts of rural taxation in China. We find that the rural taxation rates did not
increase as fast as many people conceived. The main reason that rural taxation became
an acute problem in 1990s is in large part due to the increase of rural income disparity
after 1990s and the uneven tax and fee distribution among different income groups. The
low-income peasants pay much higher shares of taxes and fees as percentages of their
incomes, which was mainly due to the fact that the poor people are usually the group of
people with lowest proportion of income from non-agricultural sources, thus they are
more vulnerable to rural taxation. We also find that government regulation is an
important factor to explain rural taxation burdens. The reason is that the regulation
entails a lot of costs not only in policy implementation and administration, but also in
corruption, since local officials can impose extra charges on peasants in the name of
implementing the central government regulations, given that the local enforcement cost
of regulation is unobservable to central government. Most importantly, with a general
theoretical framework, we further analyze the relationships between government
regulation and rural taxation, rural factor mobility, and also rural income growth and
disparity. We hypothesize that with differentiating regulation such as grain procurement
across regions (and also across households), regions (and households) that are more
heavily regulated tend to have heavier rural taxation, more vulnerable to local
bureaucracy expansion and serious corruption, lower labor and land mobility, and thus,
will result in lower income growth. Preliminary empirical studies strongly support our
hypothesis. Moreover, the more heavily regulated regions (and households) will be more
locked in agricultural production, which will further result in heavier rural taxation and
even lower income growth. This constitutes a vicious cycle for the more heavily
regulated regions (and households), while the opposite happens to the less regulated
regions (and households). In conclusion, our general framework can help us to
understand the increasing income disparity, the highly regressive nature of rural taxation
and their relationships with government regulation simultaneously. Policy implications
are also drawn in rearranging inter-governmental relationships, removing or relaxing of
government regulations, and more generally, establishing a more reasonable rural public
finance system.