Disgruntled cadres: How tax reduction undermines rural governance

Abstract

Tax reduction is supposed to garner popular support, yet rural unrest sharply increased following the Chinese government's agricultural tax reform aiming to reduce peasants' tax burden. We argue that the tax reduction could undermine village elites' economic and political incentives to assist the state in implementing unpopular policies and achieving desirable outcomes. We exploit the exogeneous timing of the agricultural tax reform that abolished the agriculture tax and estimate its impact through a rare national representative village-level panel dataset. We demonstrate that the tax reform led to tax noncompliance and rising social unrest. We further show that local governance worsened because village elites were disincentivized from carrying out state-preferred yet unpopular policies.