Farmers' Income and Production Responses to Rural Taxation Reform in Three Regions in China

The relationship between agricultural taxation and production efficiency has been thoroughly explored for many countries. Recently, China has taken various measures including the rural taxation reform (RTR) to promote grain production and to increase farmer incomes. In this study, we investigate whether the Chinese policy of abolishing rural taxation has improved farm households incomes and affected their production decisions. Using household survey data obtained from three regions in China, we estimate the effect of the RTR on farmers income. Results show that the RTR has significantly improved farmers post-tax net income by 9.2% in Shandong, 16.9% in Shanxi and 16.8% in Zhejiang. These increments, mostly from farm income rather than from off-farm income, are much higher than the direct income increase from the tax savings. In addition, we examine the dynamic impact of farmers net income, and find that the RTR has a sustained positive income effect in Shandong and Shanxi, whereas its positive effect in Zhejiang appears temporary. We also examine farmers production responses to the RTR. Results show that farmers in the three regions respond in different ways: farmers in Shandong significantly increase their labour input, farmers in Zhejiang increase intermediate inputs, whereas Shanxi farmers augment their intermediate inputs and enlarge their crop acreage. It appears that the farmers responses to the taxation reform vary due to the agronomic and economic factors in these three regions, suggesting that diverse post-RTR supplemental policies should be implemented in different regions.