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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.
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