Did China’s Tax-for-Fee Reform Improve Farmers’ Welfare in Rural China?

China enacted a rural tax reform known as the “Tax-for-Fee Reform” (TFR) in the late 1990s, in large part driven by an attempt to address farmers’ complaints about their perception of a heavy tax burden. A crucial but unanswered question is whether this reform actually improved farmers’ welfare. This paper applies several estimation methods, including both cross-sectional propensity score matching and difference-in-difference propensity score matching methods, to village-level survey data from the Chinese Household Income Project in order to examine the causal effect of the TFR on farmers’ direct and indirect welfare. “Direct” welfare is measured by net income per capita in the village, and “indirect” welfare is proxied by changes in per capita public expenditure composition. We find no evidence that the direct welfare effects of the reform improved farmer’s net income. In contrast, the reform appears to have reduced the villages’ financing capacity, and hence to have lowered their overall fiscal expenditures, especially expenditures on local welfare programs such as education, public health, and infrastructure. These indirect effects have had significant and negative impacts on farmers’ welfare. Indeed, our analysis suggests that it is poorer villages that largely undertook these expenditure adjustments, while richer villages experienced no significant changes in these welfare relevant categories.