China at the start of this year eliminated its agricultural tax, in an effort to raise rural incomes and eventually unify the taxation system, gaining praise from the US Tax Foundation.:

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The repealed agriculture tax was similar to a modern property tax.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.

The tax reform is essential for China in building a more consumer-driven society and removing factors that help maintain disparities between urban and rural residents. It’s only a single step forward though, and in an item yesterday Simon noted that some other policies could be huge steps backwards.:

A new movement, entitled the "new socialist countryside", will be the focus of rural development during the 11th Five-Year Programme. A similar slogan, "building socialist rural areas", appeared in the 1950s, but was later dismissed as part of propaganda about building a utopian society. The latest campaign draws comparisons between the situation on the mainland and South Korea’s experiences 30 years ago…

According to state media, Beijing’s vision of a "new socialist countryside" consists of five components: production growth, affluence, rural civilisation, a clean environment and democracy in the management of local affairs. The vision may look like a holistic approach, but scholars are worried that it may turn into another white-elephant construction spree….

Proper land reform, well-deliniated land rights, open and honest courts that will defend the poor from developer and government land grabs and cops that don’t shoot those defending their patches of earth are all vital. But the control freaks demand progress, and progress can only come with control. The true beauty of the capitalist market system is it works with a minimum of control, not a maximum of it.

AsiaPundit’s general view of the current CCP leadership is that they are far more sincere than their predecessors in wanting to reduce the immense gap between rural and urban Chinese. That’s a good thing, the downside is that they are also less market oriented. We can hope that the ‘new socialist countryside’ is another misnomer and that rural areas will eventually look more like the new ’socialist’ Shanghai.

However, if collectivization and state control remain central tenets for new reforms the new socialist countryside will likely look a lot like the old socialist countryside.

On rural China, one point that is often missed is that agrarian lifestyles will only produce rural-sized incomes (barring, of course, the types of protectionism and subsidies that American, European and East Asian farmers have received - something China would be wise to avoid).

The longer-term solution is allowing the urbanization and retraining of rural populations. China is not just governed by control freaks when it comes to economics, but also when it comes down to the internal movement of its people.

Further reading: Mark Thoma posts an article on China’s development troubles, government statistics (2004) on rural poverty in China. Photo nicked from the IFRC.

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