Fiscal Decentralization and Peasants’ Financial Burden in China

Using a political economy framework, this paper explores the tax-farming nature of China’s fiscally decentralized system and examines why the system incurs a particularly heavy financial burden on peasants. It points out that a political hierarchy, financed by a tax-farming system in China, fails to contain the exploitative behavior of local officials. Such a system results in expenditure devolution and revenue centralization, and peasants at the bottom of the hierarchy bear the brunt of tax burden. As the financial pressure of excessive levies and fees reaches a perilous point, peasants resort to violent protests. Unless a fiscally decentralized system with horizontal accountability mechanisms evolves, the country’s ability to sustain a centralized polity may become increasingly undermined. A case study of township finance is used to exemplify the exploitative nature of China’s fiscal decentralization system.