Agricultural tax reform, capital investment, and structural transformation in China

Identifying the driving forces of structural transformation is crucial for understanding economic development. In the early 21st century, China experienced a rapid labor shift from agricultural to non-agricultural sectors. This shift is often attributed to the industrial sector’s “pull” force, while the agricultural sector’s “push” force remains less understood. This paper investigates the role of the Agricultural Tax Exemption (ATE) reform in promoting inter-sectoral labor reallocation in China, which ended over two millennia of agricultural taxation on farmers. Our results show that the introduction of the ATE reform contributed to a significant increase in the share of non-agricultural workers. Mechanism analysis reveals that this reform encouraged capital investment among farmers and improved agricultural productivity, consequently displacing surplus agricultural workers. Further analysis shows that the labor reallocation induced by the reform had significantly increased employment and output within the secondary sector, although its effect on the tertiary sector was relatively minimal.