Industrialize with tax structure change: Agricultural tax abolition and local industrial growth in China

Abstract

This paper examines how the abolition of agricultural tax contributes to local industrialization in China through the local government's responses. Based on difference-in-differences analysis, this paper demonstrates that the agricultural tax abolition significantly increases the county-level secondary sector's share in GDP and firm-level industrial output. Furthermore, the mechanism analysis reveals that the local governments play a crucial role in supporting industrial growth by expanding bank credits and land provisions. This paper also finds that the agricultural tax abolition positively affects firm entry, TFP, and human capital investment.