STANFORD CENTER FOR INTERNATIONAL DEVELOPMENT Working Paper No. 317 Rural Taxation and Local Governance Reform in China’s Economic Transition: Origins, Policy Responses and Remaining Challenges

This paper examines the historical evolution of China's rural taxation system and provides an initial assessment of the ongoing rural tax reform. It is argued that the issue of rural taxation and local governance in China is one typical challenge arising from the inherent tension between an increasingly liberalized economic system and a still centralized political system. Though the rural tax reform has helped to reduce farmers' tax burden in the short term, the establishment of an effective local governance regime requires coordinated reforms to downsize local bureaucracy by providing social security for laid-off cadres, to strengthen local accountability by granting higher local formal tax autonomy, and to promote meaningful participation by expanding local democracy.