Fiscal Reform and Rights to the Residual

Townships, like villages, had strong incentives to develop their collectively owned enterprises. Counties were eager to promote development at both levels. But the incentives at the township and county levels centered on fiscal reform, not decollectivization. Reform granted county and township governments—unlike village governments—new rights over revenues. The 1980s fiscal reforms created a revenue residual and granted the rights to that residual to local governments down to the level of the township.

Creating the Residual

A residual, simply put, is an economic surplus. The potential benefits from this surplus make it an effective tool for hierarchical control in organizations. Yet those who study public bureaucracies note that

[33] This was actually less than the 80,000 yuan to which some were entitled. The village leadership decided that it would be better to use more of the profits for development and subsidies, especially because they felt that the managers were making so much more than they could possibly need. CI 11888.

[34] For examples, see Jean C. Oi, "Commercializing China's Rural Cadres." Also see David Zweig, et al., "Law, Contracts, and Economic Modernization."

there is no residual in the ordinary sense of the term. The typical bureau receives a budget from governmental superiors and spends all of it supplying services to a nonpaying clientele. Regardless of the agency's performance or how it changes over time, the results are not reflected in an economic surplus accruing to bureau heads, and this major incentive for the efficient monitoring of employee behavior fails to operate. Incentive plans that give employees a share of the 'profit' in partial payment for their effort . . . are also ruled out.^[35]

The closest thing to a residual that exists in most public bureaucracies is "slack." ^[36]

The above description was written by a student of American politics, but it describes accurately the situation in China prior to the 1980s fiscal reforms. The slack, to the extent that it existed, was the amount of revenue that the local governments could save from their budget allocations. To get ahead, local governments lobbied the upper levels for larger budgets.

The 1980s fiscal reforms dramatically changed the incentives for local governments. First, the central state no longer guaranteed upper-level budget allocations to meet local expenditures. China converted a vertical (tiao) apportionment system that had allocated revenues from the upper to the lower levels into a system in which localities had to rely primarily on horizontal flows (kuai)— that is, on income that they generated themselves. The impact of the 1980s reforms is captured by the colloquial phrase "eating in separate kitchens," the antithesis of the situation during the Maoist period when everyone "ate from one kitchen."

Second, behaving more like a business organization than a public bureaucracy, China began to motivate its agents by granting local governments clear rights to any economic surplus that they were able to generate. Contrary to what some observers have argued, this surplus was not simply more "organizational slack"; it was a residual.^[37] The 1980s fiscal reforms eliminated the organizational slack for local governments, but it granted them rights to a residual. Even though these rights were granted to governments, not individuals, the re-allocation of property rights gave localities positive inducements to promote rapid economic growth, which became not only a necessary strategy for bureaucratic survival but a viable strategy for getting ahead.

[35] Moe, "New Economics of Organization," p. 763.

[36] Ibid., p. 763. See Richard Cyert and James March, Behavioral Theory of the Firm, for the original discussion of the role of slack; also William Niskanen, "Bureaucrats and Politicians."

[37] See Shirk, Political Logic of Economic Reform, p. 160.

Defining the Residual

Let me now turn to the details of the 1980s revenue-sharing system to explain how the residual was generated at the township level and above and to describe the property rights that different levels of local government had over these revenues.^[38] The terms of revenue sharing are technical (some readers may prefer to skip these sections), but the details of the system are important in that they reveal why localities found certain development strategies more attractive than others. Disparate types of revenues were treated differently. Some, by definition, had to be shared with the center; others fell directly into the category of the residual.

Revenue-Sharing Contracts

Revenue sharing is a process in which local governments down to the level of the township have the responsibility for collecting all nationally set taxes and then turning over a portion of this revenue to the next higher level. Those who have increased their tax revenues are allowed to keep the major portion of the increase. The more a locality collects, the more it can keep. The provisions of revenue sharing are formalized in fiscal contracts between the central state and each of its provinces, between each province and its prefectures, between each prefecture and its counties, and between each county and its townships.^[39] The terms of the contracts vary. Some areas employ an overall ratio, such as 70:30; the level of government from which the taxes are collected keeps 70 percent and 30 percent is sent to the next higher level. In other cases, a level of government pays a fixed lump-sum quota to the next higher level, but,

[38] Differences that have appeared as a result of the 1994 reforms will be treated separately later in the chapter.

[39] When revenue sharing was first instituted in 1980, only governments down to the county level were eligible to participate. Up until the mid-1980s, townships collected taxes, but they had no right to keep any of them. The effort to establish township-level finance departments began in 1983. A National Financial Work Conference advised all prefectures to select two counties to set up experimental township finance departments. All taxes were turned over to the county, and the county then continued the old system of allocating a budget for the township's expenses. Only in April 1985, when the State Council approved a directive issued by the Ministry of Finance, "On Township [xiang/zhen] Fiscal Management Experimental Methods," was the fiscal system extended to the townships. Official reports state that by the end of 1986, 91.4 percent of all townships (xiang and zhen) in the country had established finance departments that paved the way for revenue sharing. Caizhengbu caishui tizhi gaigesi, Caishui gaige shinian, pp. 14-15, 205-6. My fieldwork revealed that in 1996 some townships were still not subject to revenue sharing.

once that quota is met, the level of government that has collected the revenue retains all, or the bulk, of the over-quota tax revenues. Regardless of the system of revenue sharing in effect, increased tax collection guarantees a locality an increase in retained tax revenues.

Revenue sharing is premised on localities producing sufficient revenues to meet their own expenses and producing a surplus that they will share with the upper levels. Localities that fail to generate a surplus need not share tax revenues with the upper levels. Unlike fiscal systems being tried in former socialist economies such as Russia, the Chinese system headed off potential opposition to the reforms from poorer areas by building in a revenue "safety net." ^[40]

Within each level of administration, there are those who make payments, those who do not, and those who receive subsidies. The status of each locality is determined by a complex calculation involving (1) fixed expenditures; (2) fixed receipts; (3) fixed payments upward, and (4) fixed subsidies. Fixed expenditures are the amount that the higher authorities determine to be the "minimum essential budget" items for the local government. What constitutes the minimum essential budget is the subject of intense negotiations between the levels, but at a minimum, fixed expenditures include the payment of base salaries to state cadres on the local payroll^[41] and the funding of primary services, such as education, health, roads, and housing. How much is provided for each expense reflects past expenditures, with some provisions for increases based on population. Fixed expenditures also include "development needs," an amorphous category that, as explained by a finance bureau head, encompasses costs for agriculture, irrigation, and forestry, and the vague category of "developing the rural commodity economy," which includes expenses for rural enterprises engaged in mining, seed production, and animal husbandry, among other activities. Once the fixed expenditures are set, this amount is compared with the "fixed receipts," which are equal to the tax collection quota set for the locality.

A locality makes a "fixed payment upward" to the next higher administrative level only if its fixed receipts are greater than its fixed expenditures. If expenditures and receipts are equal, the locality neither pays revenue to the upper level nor receives a subsidy. If the fixed receipts are

[40] On Russia, see Bahl and Wallace, "Revenue Sharing in Russia"; Jon Craig and George Kopits, "Intergovernmental Fiscal Relations"; and Jorge Martinez-Vazquez, "Expenditure Assignment."

[41] Some cadres who work at the local-government level are not considered state cadres; thus they are not paid from the official budget but from extrabudgetary funds.

less than the fixed expenditures, the difference is the "fixed subsidy" for the area.^[42] This becomes the subsistence ceiling or social safety net for the locality.

At every level, from province to township, some units failed to generate sufficient revenues to cover expenditures.^[43] Nationwide, in 1991, out of thirty-five listed provinces, autonomous regions, and municipalities, fourteen received fiscal transfers from the center.^[44] Table 1 describes the revenue-sharing systems in twenty-seven provinces and municipalities in 1992 and indicates which received fiscal subsidies. The picture is similarly diverse at the local level. For example, throughout the 1980s and into the 1990s in one Shandong prefecture with six counties and one municipality, only one county and the one municipality paid revenues to the prefecture; within that one county, only seven out of the seventeen townships paid revenues to the county.^[45]

An obvious question is whether subsidies result in the continuation of the "iron rice bowl" mentality. Do localities that receive subsidies have an incentive to develop? There is evidence that while local budget constraints are softened by the existence of subsidies, the pressure to increase revenue remains strong. One North China county's production and income statistics show that over a ten-year period when fiscal contracting was in effect, all subsidized townships pursued economic growth and increased income. Moreover, while the output value of tax-paying townships was higher than that of the subsidized townships, the growth rate of subsidized townships was significantly higher than that of tax-paying townships.^[46] A similar pattern of more rapid revenue increase in poor areas is noted in twenty-five counties nationwide, including those in poorer provinces.^[47]

[42] Caizhengbu, Caishui gaige shinian, p. 13, explains that if the locality's set income is less than expenditures, a prescribed ratio is used to determine how much of a locality's other revenues will be retained; when the local set revenue and the central-local shared revenue together are not sufficient to cover expenses, the center will give a fixed subsidy to the locality. Once this is established, it will not change for five years.

[43] Drawing on a report by China's minister of finance, Christine Wong has noted that in 1989 localities remitted a total of 44.7 billion yuan to the central budget while receiving central subsidies of 56.3 billion yuan. "Central-Local Relations," p. 698.

[44] Agarwala, China, p. 68.

[45] CI 8791.

[46] These findings emerged from a regression analysis on tax and output time series data for 1984-1993 for seventeen townships in one county. The results were highly significant (at 0.1 level). I would like to thank Tony Chung, Hong Kong University of Science and Technology, for his help with the statistical work that derived these findings.

[47] (Cited in Park et al., "Distributional Consequences," p. 761. Park et al. found a similar trend for Shaanxi. The growth of revenue per capita in poorer counties outpaced that of the nonpoor counties. They found that the counties that received the most subsidies grew the fastest in terms of revenue per capita (p. 758).

Such findings are not surprising. The subsidies are barely sufficient to pay basic expenses. In the really poor areas, these subsidies are in fact often insufficient to meet even essential expenditures.^[48] In most areas no slack exists for the improvement of services or bureaucratic growth.^[49] The fixed subsidies generally pay only for a set number of bureaucratic positions; no funds are provided for cost overruns.^[50] Furthermore, townships in the North China county cited above had the added security and incentive of knowing that they could keep additional revenues over the "fixed receipt" quota and continue to receive the agreed upon "fixed subsidy." Ten out of the county's seventeen townships that had the status of fixed-subsidy townships were allowed to keep that designation over a number of contract periods, even as their tax collection—the "fixed receipts"—exceeded the contract amount.^[51]

Taxes

Under the 1980s revenue-sharing schemes, the nationally set taxes that the localities had to collect fell into two major categories: income tax and industrial-commercial taxes. Appendix B provides a full list of taxes and how they were shared under the 1980 (table 10) and 1985 (table 11) systems.

Income Tax

In the Maoist period, state-owned industries had little incentive to be profitable. Factories were required to turn over all profits to the state. In return, their wage bills and other budgeted expenses were met by the state. These profits rather than taxes provided the bulk of government revenue from state-owned enterprises.^[52] A "tax for profit" (ligaishui) reform was instituted in the 1980s simultaneously to provide the state with revenue and to give state-owned enterprises an incentive to be more efficient and profitable.

[48] Park et al., "Distributional Consequences."

[49] Exceptions are minority areas classified as "poor," such as those that Xiaolin Guo studied in "Variation in Local Property Rights"; local officials in northwest Yunnan found the subsidies to be sufficiently lucrative to warrant hiding the number of township-owned enterprises from the upper levels.

[50] On the growth of local governments, see White, "Political Reform and Rural Government" and "Below Bureaucracy."

[51] Cl 8791.

[52] A World Bank report states that until 1983, approximately 60 percent of government revenue was generated from the remittance of profits from state-owned enterprises. China, p. 2.

The enterprise income tax (giye suode shui) was the mechanism devised for this purpose. In actuality it was a profit tax. The rate was based on an eight-grade progressive scale that ranged from a low of 10 percent for profits under 1,000 yuan to a high of 55 percent on profits over 200,000 yuan. In 1985 this income tax was extended to township and village enterprises, replacing the industrial-commercial income tax (gongshang suode shui).^[53]

Local governments were required to collect income tax from all enterprises located in their administrative jurisdictions. Rights to this tax revenue depended on the level of government to which the enterprise belonged. Enterprises were divided between central and local governments. Central-level enterprises included, among others, all banks and post offices. All income tax from these enterprises had to be given to the center. All income tax from local enterprises remained in the locality.

Industrial-Commercial Taxes

The second category of taxes collected by the localities is loosely termed "circulation taxes" (liuzhuan shui) or "industrial-commercial taxes" (gongshang shui). The category primarily includes product (chanpin), value-added (zengzhi), and turnover/business (yingye) taxes.^[54] Each of these taxes is based on production, income, or sales, irrespective of profits. Together, they make up the bulk of total tax revenues. These taxes are levied on private, state, and collectively owned enterprises, including township and village firms.^[55] The revenue from these taxes is shared between the center and the localities.

Prior to the 1980s, the primary source of industrial tax revenue was county-level state or collectively owned enterprises. Since the post-Mao reforms, county-level industry continues to be the bedrock of countylevel income and taxes, even in those counties with relatively high success in developing rural industry, but its tax contribution has decreased as a proportion of total revenues as rural enterprises have grown.^[56] Aggregate statistics show that the lion's share of the increases in circulation/

[53] Wang Xiaoxu, ed., Nashui shiyong shouce, p. 49.

[54] For details on the evolution of these taxes see Caizhengbu caishui tizhi gaigesi, Caishui gaige shinian.

[55] Under the 1985 system, the income tax from county-level state-owned enterprises was shared, but not that from townships, villages, or privately owned enterprises. With the change to the total-revenue-sharing system after 1988, this distinction became meaningless.

[56] See Wong, "Central-Local Relations"; and Barry Naughton, "Implications of the State Monopoly."

industrial-commercial taxes came from township and village enterprises. Between 1978 and 1987, these taxes from township and village enterprises increased from a little over 2 billion yuan to 17 billion yuan; in 1988 alone, there was a 40.7 percent increase in tax revenue from these enterprises.^[57] In 1990 these taxes totaled 34.4 billion yuan, and by 1995 they were up to 205.8 billion yuan—almost a fivefold increase.^[58]

Maximizing the Residual

Given the pressures imposed on local governments to be fiscally self-sufficient and the incentives to increase revenues under the new fiscal system, one might have predicted that these governments would engage in predatory taxation.^[59] Yet my fieldwork strongly suggests that some Chinese local governments have been relatively generous in the assessment and collection of state taxes. One such example is counties that allow their poorer townships to keep increased revenues when it is time to sign new fiscal contracts. Another example is local governments that grant generous tax breaks to their local enterprises.

While the growth of tax contributions from collective rural enterprises is impressive, local governments failed to obtain the maximum amount of taxes from their firms. Some of this failure may have been due to tax evasion, but it was not a case of outside tax collectors having the wool pulled over their eyes. Collection and assessment were done by local tax officials who had intimate knowledge of local enterprises.^[60] The evidence suggests that minimum rather than maximum taxation was the result of conscious local policy to underassess taxes on favored enterprises.

National regulations allow township and village enterprises favorable tax treatment. Factories that meet certain criteria, such as serving agriculture or hiring the handicapped have special exemptions.^[61] Village factories for the disabled, for example, have tax-free status.^[62] New enterprises were exempt from income tax for their first year of business. Old factories that started a new product line also qualified to receive a one-year tax holiday on those profits. But some localities went beyond

[57] Detailed statistics on the early years of rural enterprise development are in Zhongguo xiangzhen qiye nianjian, 1978-1987.

[58] Nongyebu xiangzhen qiyesi juhua caiwuchu, 1995 nian quanguo xiangzhen, pp. 2-8.

[59] See, for example, Margaret Levi, Of Rule and Revenue.

[60] This will be examined in chapter 6.

[61] Those located in old revolutionary base areas also fall into this category.

[62] See Zhongguo xiangzhen qiye nianjian, 1978-1987, p. 270, for a list of the official exemptions.

official regulations to extend this favorable treatment to two and three years.

In some areas, across-the-board cuts were granted as standard practice; some provinces were particularly generous. In Zhejiang province, if the tax rate for an enterprise came to more than 30 percent according to the nationally set scale, the amount taxed at the higher rate was cut in half. In Guangdong province, if the tax rate was above 20 percent, the tax levied above that level was also cut in half.^[63] In addition, county officials allowed ad hoc tax breaks for local enterprises. For example, in 1987 a county outside Tianjin collected 59.3 million yuan in taxes but allowed almost half as much, 26.65 million yuan, in tax breaks.^[64] Nationwide in 1987, out of 20.7 billion yuan in profits earned by township and village enterprises, 17.4 percent, or 3.6 billion yuan, was exempt from taxes.^[65]

Local officials are constrained in their largesse by nationally set tax rates. But, as a World Bank study notes, "Provincial governments cannot vary the nominal rates of tax, nor may they redefine the legal tax base. However, they have almost complete autonomy in assessing and collecting taxes, and along with the lower level county government can and do give tax relief without having to seek approval from the center. One can fairly say that subnational governments can substantially alter the level and pattern of effective tax rates by enterprises." ^[66]

My interviews at the county level show that local officials can and do manipulate the tax base to lower indirectly the taxes that enterprises must pay. This strategy works particularly well with the income tax. Local officials can redefine certain items as factory costs, which are then deducted prior to assessing the income tax—remember that this is a tax on profit, not on total income. In some cases, enterprises have been allowed to negotiate an agreement whereby loan repayments are deducted from the tax base before the income tax is calculated.^[67] There is less leeway to manipulate the industrial-commercial taxes, but sometimes reductions and exemptions are given for these taxes also.

[63] He Xian, "Woguo."

[64] Cl 8888.

[65] Zhongguo xiangzhen qiye nianjian, 1978-1987, p. 270. On tax reductions and exemptions nationwide, see Yuan Dong, "Problems in the Financial Relationship Between the Central Government and Local Governments and Ways to Resolve Them," Zhongguo jingji wenti, 20 January 1992, no. 1, translated in JPRS-CAR-92-035, 2 June 1992, pp. 35-40.

[66] World Bank, China, p. 84.

[67] In 1990 this arrangement was abolished for collectively owned enterprises but was still allowed for state-owned enterprises.

How much local officials allow enterprises and subordinate levels to get away with depends on how much revenue is available. Local governments can ill afford to be too lax about tax collection. A fine line must be walked that balances tax breaks with tax needs. The degree to which local officials pursue tax collection will vary according to local conditions. The county outside Tianjin that gave almost half of the collectible tax amount in breaks contained one of the highest income-generating villages in China. In contrast, poor counties have little ability to provide their enterprises leeway given the tremendous difficulties that these areas have in raising enough revenue to meet minimum expenses. This may explain why poor provinces exert greater tax efforts than rich ones.^[68] Local governments must in the end meet their tax quotas specified under the revenue-sharing contracts. But in a context where the economy is growing and there is a surplus, local governments may tax at minimum rather than maximum levels.

Within-Budget and Extrabudgetary Revenues

In trying to understand why local governments give tax breaks, one must realize that these governments have access to a number of different types of revenues. This is where the technical terms of revenue sharing become relevant. Revenue is divided into two major categories: within-budget and extrabudgetary. The taxes that have been described so far—the income and industrial—commercial taxes—fall into the category of withinbudget funds (yusuannei zijin). But in addition to these state tax revenues that are subject to revenue sharing with the upper levels, there are also revenues that are not—the extrabudgetary revenues (yusuanwai zijin). These include a category of taxes known as "local taxes" (see below) and all money that falls into the category of nontax revenues— including fees, surcharges, retained profits and other revenue that local governments are entitled to collect from their enterprises and other sectors of their economy on top of state taxes. Localities have the right to retain these revenues in their entirety. Table 2 shows the major sources for these two types of revenue.

The distinction between within-budget and extrabudgetary funds existed during the Maoist period, but extrabudgetary funds were mini-

[68] Park et al., "Distributional Consequences," offer this as an explanation for their findings of increased revenue growth in the poorer counties in Shaanxi.

mal,^[69] at best, and they were subject to upper-level controls. The attractiveness of these funds to localities is reflected in their extraordinary growth in the 1980s. The reported average annual increase of extrabudgetary funds for the 1978-1987 period was 21.67 percent.^[70]

The growth and significance of these extrabudgetary revenues become readily apparent when they are compared with the within-budget revenues. In 1978, extrabudgetary revenue was 34.7 billion yuan, or 31 percent of within-budget revenues (112.1 billion yuan). By 1987, extra-

[69] See Wong, "Fiscal Reform and Local Industrialization," p. 205.

[70] This rate exceeds that of the growth of the total national product (chanzhi) for the same period by 10.6 percent, of the national income (guomin shouru) by 8.9 percent, and of the national within-budget revenue by 8.1 percent. Caizhengbu, Caishui gaige shinian, p. 322. Tam On Kit, "Fiscal Policy Issues in China," estimates that nationwide between 1978 and 1988 there was a sixfold increase in the amount of extrabudgetary revenue. One Chinese source indicates that in 1990 extrabudgetary funds equaled 275 billion yuan, a figure that represents a 79.7 percent increase from 1985. It also reports that the average annual increase exceeded the average annual increase for the same period of within-budget income. Xiang Huaicheng, ed., Jiushi niandai caizbeng, p. 296.

Figure 2. 
Central and local extrabudgetary revenues, 
1982-1994 (Source:Zhongguo tongji nianjian, 1996,  p. 236)

budgetary revenues were 89.66 percent of within-budget revenues.^[71] However, it is not just the growth of these revenues that is notable but the fact that over time the localities were getting a larger portion (see figure 2). The growth of local extrabudgetary revenues was the result of strategic planning on the part of localities to develop those sectors and activities that yielded not only the most revenue but also the most extrabudgetary revenue.

The economic logic behind the general pattern of local growth is

[71] Caizhengbu, Caishui gaige shinian, p. 323.

Figure 3. 
Tax revenue from agriculture and industry, 1952-1994 
(Sources: Zhongguo tongji nianjian, 1991, p. 213; 
Zhongguo tongji nianjian, 1996, p. 228)

revealed in the following sections, which enumerate the sources of extrabudgetary funds at the county, township, and village levels. Sources of both tax revenue and extrabudgetary revenues cluster around industry and commerce. As figure 3 shows, agricultural taxes remained relatively flat while the industrial-commercial tax on industry grew steadily and rapidly. Not surprisingly, the composition of the rural economy moved noticeably from agriculture to industry and commerce in the 1980s.

Rights to these local and nontax revenues lie at the heart of why local governments need not assess national taxes in the predatory fashion that would be expected given the fiscal constraints imposed by revenue sharing. Localities maximize the residual by minimizing the revenues subject to revenue sharing—that is, national taxes.

This is especially true at the township and village levels where collectively owned enterprises pay a substantial amount of nontax payments to local coffers.^[72] County government has the most to lose from minimum rather than maximum taxation on township and village enterprises. But counties in the 1980s seemed content to take a longer-range view that promoted growth within their townships and villages rather than capturing maximum amounts of taxes from existing enterprises in the short term. One must also remember that county officials were judged not just by the amount of taxes collected but by the overall prosperity and growth of the county. Moreover, the county had its own sources of extrabudgetary funds.

The County Residual

The residual accruing to county coffers consists of funds officially authorized as "extrabudgetary" and taxes defined as "local."

Extrabudgetary Funds

The total of a county's extrabudgetary funds is a composite of individual accounts. This includes

1. revenue belonging to local finance departments

2. income of institutional and administrative units not counted in within-budget funds

3. various specialized funds held by state-owned enterprises and their leading organs

4. income from enterprises belonging to the localities and income of central departments that is not included in within-budget funds.^[73]

[72] All after-tax revenues fall into the residual category.

[73] These categories are defined in the tax handbook, Wang Xiaoxu, ed., Nashui shiyong shouce, p. 27.

As figure 4 shows, the bulk of extrabudgetary funds consists of the retained enterprise funds.^[74] Nationwide, retained enterprise funds increased almost nineteenfold from 1978 to 1987.^[75] The most important of these are the profit, depreciation, welfare, and bonus funds. The increase in these funds was due to the profit retention (liuli) and tax for profit (ligaishui) reforms, and the various responsibility systems designed to reinvigorate the fiscal reserves of enterprises. A 1985 regulation allowed some industrial sectors (hangye) and enterprises to raise their depreciation rate. Because depreciation could be written into costs, this change also served to decrease income taxes by reducing profits.

The next largest holdings are the miscellaneous extrabudgetary revenues of individual departments and administrative units that are overseen by the county finance bureau. The management fee that the rural enterprise management bureau receives from township-owned enterprises is an example of such extrabudgetary revenue. Another bureauheld extrabudgetary fund is the "individual entrepreneur's industrialcommercial management fee" (geti gongshang yehu guanli fei) that individual and private entrepreneurs pay when they are licensed.^[76] This fee is collected jointly by the county Administration for Industry and Commerce and the Individual Entrepreneurs Association.^[77] The latter also collects an association fee (huifei) that belongs entirely to the association and has grown quite substantial.^[78] In one county in 1990, it amounted to almost 1 million yuan.^[79] Another source of extrabudgetary funds is the profits from commercial companies set up by county agencies. For example, when the rural enterprise management bureau sets up a material supply company, the company's after-tax revenues fall into the extrabudgetary category.

[74] A 1990 World Bank report states that extrabudgetary revenues of the government generally accounted for only about 3 percent of total extrabudgetary funds; agencies retained about 17 percent, while enterprises retained about 80 percent. China, pp. 85-86.

[75] Caizhengbu, Caishui gaige shinian, p. 322.

[76] The rate varied according to sector: the rate for commerce (shangye) was .05 percent of total sales (xiaoshou e), and for transport (yunshu) 1.5 percent of total business (jingying e). One North China county where private enterprise developed only gradually collected in 1989 over 700,000 yuan from these fees; by 1990 the amount reached almost 1 million yuan. Cl 81291.

[77] Each receives 50 percent after a percentage of the total is sent to the prefectural level. Cl 81291.

[78] This fee was instituted in 1984, abolished in 1985-1986, and then reinstituted. In 1991 it was 6 yuan per year and was designated for the welfare and relief of association members. CI 81291.

[79] CI 81291.

Figure 4. 
Extrabudgetary funds by source, 1981-1990
(Source: Adaptedfrom Christine P. W. Wong, Christopher 
Heady, and Wing T. Woo,  FiscalManagement and Economic 
Reform in the People's Republic of China, pp. 236-37)

Local Taxes

Local taxes are those designated by the central state as belonging exclusively to the localities. Table 2 lists the main items that county-level finance and tax bureau officials in the late 1980s enumerated as local taxes. The potency of the residual as an incentive for shaping local growth is highlighted by the rise in the revenues that are defined as "local taxes."

The tremendous upsurge in extrabudgetary funds stems primarily from the increase in originally allowed local taxes, not the addition of new items into the category of extrabudgetary items.

When tax designations were drawn, most of the items classified as local taxes were fairly inconsequential sources of revenue—which may explain why the center granted the rights over these to the localities in the first place. Tax revenue from private enterprises is a good example. It has grown enormously. In one county, taxes on the private sector, starting from almost zero in the early 1980s, had grown to 17.6 percent of total county taxes by 1984; and by 1990 they were almost one-quarter of that total.^[80] Given the importance of these taxes, it is not surprising that in 1990 this county issued quotas for the development of private enterprises to each of its townships.

The Township Residual

The residual at the township level was minimal, if there was any at all, prior to the reforms. Known as communes before decollectivization, townships generally had few revenue sources other than fees levied on its brigades and teams and the agricultural tax. Some commune-level enterprises existed, but townships received only limited income from such industries. Some commune factories did not even pay profits to the commune; the income remained within the factories, perhaps because it was minimal.^[81] Most factory income went to pay for expenses, including food rations for workers.^[82]

Yet by the latter part of the 1980s, total extrabudgetary revenues in some townships exceeded within-budget revenues. The sources of the township residual included a portion of the fees assessed by villages on their residents, the tiliu, and various fees (tongchou) that were levied by the township on villages. However, the primary source of township extrabudgetary funds was collectively owned township enterprise.

[80] Statistics provided by the county tax bureau, 1991. This does not include the agricultural tax.

[81] In one township, factories began to pay profits to the commune beginning in 1976, when they paid 40 percent. They also paid an income tax of 20 percent of total profits. By 1988, when the eight-grade scale employed for urban enterprises was put into effect, if the profits were more than 100,000 yuan, the factory paid a set rate of 53 percent; if profits were over 200,000 yuan, the rate was 55 percent. Cl 22688.

[82] For further details of the collective agricultural work system, see Oi, State and Peasant.

The amounts of nontax extrabudgetary fees and ad hoc surcharges extracted from the collectively owned enterprises differed by locality; but overall the amounts were excessive enough to prompt press warnings that "township enterprises should not be treated as 'small cash registers' from which money can be taken at will." ^[83]

Standard Assessments

Township-owned enterprises pay nontax levies to both the township government and to the specialized bureaucratic agency within the government responsible for township enterprise development, the township economic commission (xiang jingji weiyuan hui) (see chapter 4).

The township government receives a set percentage of the gross income of all township-owned enterprises before any rent or taxes, including income tax, are extracted. National regulations stipulate a rate of 10 percent, but in some cases the amount is as much as 20 percent.^[84] All townships require this payment.^[85] In addition, most township governments also receive a portion of the after-tax profits of their enterprises.

The township economic commission receives the bulk of nontax payments made by township-owned enterprises. First, the commission levies a management fee on total sales.^[86] Second, it collects a contract fee (rent) from each of its township-owned enterprises. The rents paid by the contractors (factory managers) are determined and stipulated in contracts

[83] "Township Enterprises Should Also Implement Reform," Jingji cankao, 18 November 1988, p. 1, translated in JPRS-CAR-88-005, 18 February 1988, pp. 20-21. Christine Wong, "Interpreting Rural Industrial Growth," p. 23, also refers to this problem.

[84] This was the case in a Shandong township. Cl 72188.

[85] Some areas also levy an additional amount, bunong bufu jijin (aid agriculture, aid sidelines fund) before taxes. Sidelines include such activities as pig raising. In the vicinity of Shanghai, this charge is 10 percent. In the same region, there is yet a third levy, on enterprise workers, that also goes into the "aid agriculture, aid sidelines fund." He Xian, "Woguo."

[86] The fee varies. In parts of Sichuan, for example, it is 1 percent of total income. There the money is collected by the tax office from both village and township enterprises. The township receives the money, but then gives a portion to the economic commission. CI 81786. However, in one county near Ji'nan, Shandong, 1 percent of total sales is levied by the township economic commission as the management fee, but only on townshipowned enterprises. Different portions are then allotted to the township and county governments. CI 53188. In this same county in 1993, the rate was reduced to between .5 and .7 percent, with the township allowed to keep 40 percent of the total while 30 percent went to the county, 20 percent to the prefecture, and 10 percent to the province. CI 62296. In another Shandong county, this one near Qingdao, the township government levies a fee of 20 percent of enterprise profits and then pays the township economic commission a percentage as the management fee. CI 72388. In Jinghai county outside Tianjin, perhaps because it includes the highly industrialized Daqiuzhuang, the economic commission takes only .6 percent of sales as a management fee.

in ways similar to those described for the village enterprises. Total aftertax profits, quota profits, and over-quota profits are treated differently, and a percentage is taken of each. National regulations stipulate that township governments are limited to 20 percent of after-tax profits, but again, in practice, the amounts may be larger.^[87]

Ad Hoc Surcharges

On top of the standard management fee and the contracted profit (rent), township governments, like village authorities, institute a variety of other ad hoc levies to meet shortfalls in local revenue. It is because of these levies that enterprises have been dubbed the "cash registers" of local authorities. The heads of various economic commissions admit that they take profits from rich enterprises when they need extra funds. In one case, between 1986 and 1988 a township economic commission took over 3 million yuan when it needed extra funds.^[88] Although some of my interviewees denied engaging in these practices, they all had heard of such instances and knew of areas where the practices had been employed.

The local variations and ad hoc nature of these levies make it difficult to determine how much is extracted by township governments and their economic commissions. A national study shows substantial variation among regions in the amounts paid to township governments.^[89] How much is extracted also depends on the availability of other sources of capital. Chapter 6 will show that when bank credit was tight, as it was in 1988-1989, such within-township levies were prevalent.