This chapter explores the history of the tobacco and wine taxes in Guangdong in the context of China's financial transformation. This case highlights the experience of Guangdong as a pioneering model for the Chinese fiscal state. The financial system of the central government in the Qing dynasty mainly relied on land taxes from the provinces, with few tax sources exclusively controlled by the central government. This financial structure did not change until the end of the late Qing dynasty. With the beginning of the Republican era, the central government sought to ensure its continued access to independent financial resources through a division between national and local taxes. The most prominent feature of China's financial transformation in the twentieth century was the growing importance of industrial and commercial taxes as a form of indirect taxes. Even in the twenty-first century, almost half of Chinese tax revenue is derived from indirect taxes, while the proportion of direct taxes, such as the income tax or the inheritance tax, remains low.

Of the several new taxes introduced in modern China, the tobacco and wine taxes were the only successful taxes that survived and developed into a main source of tax revenue during the Republican era. Under Nationalist rule, business taxes, income taxes, and other modern taxes were modestly and only partially introduced.

The late Qing era witnessed a growing awareness of the necessity for fiscal modernization as part of the modern nation-building process. Fiscal reform efforts included the introduction of a Western budget system, enforcement of indirect taxes on the industrial and commercial sectors, and a break from the dependency on a land tax. The 1898 Hundred Days’ Reform furthered discussions on financial modernization, as unfolded in the “Basic Principles of the New Policy” (Xinzheng shiji), written by He Qi and Hu Liyuan in 1898, on the necessity of a division between state and local taxes. After an aborted attempt, the Guangxu emperor ordered a compilation of the government budget for the first time in 1899. However, Sheng Xuanhuai's memorial about compiling an annual budget was not accepted by the imperial court amid the conservative atmosphere that dominated after the failure of the Hundred Days’ Reform.

The start of the New Policy reform paved the way to full-scale modernization. Zhang Jian, a prominent reformer, in his 1901 publication “Discussion on the Reform” (bianfa pingyi), counted “the creation of a budget” as one of the twelve urgent tasks for the Board of Revenue (hubu). The Finance Office (caizhengchu), an institution separate from the regular bureaucracy, was finally established by the Qing court in 1903. The first government bank acting as the public treasury, Hubu Bank, was opened in 1904, with a total capital of 4 million taels.

Merchants and the sugar monopoly

The project of the Guangdong provincial government to revive the sugar industry consisted of the building of state-run mechanized sugar factories for production and strict official control over distribution. Guangdong's sugar monopoly, characteristic of the industrialization led by the Guangdong provincial government (hereafter, the GPG), was the first such attempt in Republican China, and the policy had a significant impact on the provincial economy.

The GPG abolished the existing native sugar tax (tutangjuan) and instead imposed the Special Tax on Imported Sugar in May 1934. It was claimed this measure would protect both native sugar and refined sugar produced by the future state-run sugar factories.

The tax modernization pursued in modern and contemporary China did not proceed in a manner that was disconnected from the outside world. Rather, it was carried out with an awareness of and reference to trends in the tax systems in other countries. For example, the tax reforms of the late Qing empire and Republican China were profoundly influenced by the Japanese Meiji fiscal model. There is comparable example in the United States as the size of the country grew important during the Nationalist period. More recently, the People's Republic of China has been studying the United States as a reference model for future tax reforms.

A. K. Mehrotra, an American historian of legal history and tax law, suggests that historical research on taxation is an area that can shed new light on the history of capitalism. Modern countries feature a legitimate monopoly over violence, such as the military and the police as well as legal and exclusive rights to collect taxes. They have also developed their own tax systems in line with their economic structures and stage of industrialization. The trajectory of tax policy varies in line with the various paths of capitalist development.

This chapter investigates long-term change in the Chinese fiscal structure in comparison with comparable counterparts and reference countries at each stage of development, with the aim of identifying the features of Chinese fiscal modernization and the impact of the Guangdong model.

From the late Qing to the 1920s, abolition of the likin was always a priority on the Chinese tax reform agenda. But it was not until the establishment of the Nanjing Nationalist Government (hereafter NNG) that the policy of “abolishing the likin and creating a new tax” (caili jiashui) was implemented in conjunction with the restoration of tariff sovereignty. The NNG secured high-revenue income by raising the tariff rate instead of promising abolition of the likin from the Western powers. To compensate for the loss of expected revenue loss due to the abolition of the likin, the NNG allocated land taxes to the local governments. However, Guangdong province, which was already highly commercialized, could not match the loss of the likin with gains from the land tax. This chapter examines how the Guangdong provincial government (hereafter, the GPG) responded to the central government's policy to abolish the likin in the 1930s by focusing on the creation of the “special tax.”

The origins of the special tax: Between the likin and tariffs

The special tax was a local tariff on foreign goods transferred to Guangdong province. However, in reality it was more complicated. First, it had the nature of a tariff in that it targeted imported goods. Second, it had the nature of the likin in that domestic cargo from other provinces could also be subject to this taxation.

The construction of state-owned enterprises is one of the outstanding characteristics of Guangdong finance in the 1930s. Although there was some building of provincial government industries in the late Qing, the building of government industries during the Three-Year Administrative Plan (1933–1936) represented a significant success. In terms of the scale of investment and profits, Guangdong's building of twenty-four government factories was the biggest project in China in the 1930s. This chapter focuses on the construction of sugar refineries to analyze China's financial and fiscal strategy during this period. With the greatest amount of invested capital among government factories, the project to build modern sugar refineries was most successful. To protect the government sugar mills, the Guangdong provincial government (hereafter, the GPG) followed an import substitution policy to impose the Special Tax on Sugar Imports, which also became a significant source of revenue. The largest profits, however, came from the sugar monopoly that began in 1934. Like the salt monopoly, a major tax source in traditional China, the GPG took control not only of provincial sugar products but also control over the distribution of imports for sales by licensed merchants.

China recently joined the group of G2 countries, alongside the United States, but the Chinese model has been offered as an alternative to the Western model. The Beijing consensus includes not only other political and socioeconomic options but also cultural and philosophical replacements. Professor R. Bin Wong argues that the traditional China of the Ming and Qing dynasties has something in common with today's welfare state. By examining Chinese notions of good governance (shanzheng), based on light taxation and the provision of social goods – pursued between 1500 and the mid-nineteenth century – and the pre-1850 success of this ideological state-operation, he finds that, ideologically, the traditional Chinese state was a transcendental arbitrator between contradictory interests among social groups and played the role of agency to flatten social inequality.

Meanwhile, to win routine wars, Europe gradually created militaryfiscal nations and developed a technique for fiscal operations of modern states by adopting indirect taxes, such as commercial and excise taxes, and raising finance from the private sector and overseas capital markets by issuing bonds. This model contrasts sharply with that of the Chinese moral economy where it is not permitted for the state to “contend with the people for interests.” Superficially, this Chinese large-scale granary system to relieve famine and the fiscal subsidy system to move finances between the rich and poor provinces is similar to the current welfare state.

But what about the reality? According to the governing philosophy of the Chinese empire, the widening of wealth inequalities often led to rebellion and turmoil.

The process of tax-farming

This chapter demonstrates the specific process of the tax-farming contract using five files related to the tax contractors, found among the documents of the Department of Finance, Guangdong Provincial Archives. Table 8.1 below provides an overview of each cited file.

File No. 3 focuses on a provincial level contractor completing a oneyear contract term without a problem. The other files are all related to sub-provincial contract issues. No. 5 is a compilation of documents about the process of changing from a contract to a government agency for tax collection. File Nos. 1, 2, and 4, related to debt collection, provide many clues to understanding the operations of the contract company. These contractors were all in default on their monthly rent. The Department of Finance confiscated their securities and assets, and sometimes ordered that the company's shareholders be arrested in order to collect the debt. In the course of events, the merchants began to bargain with the authorities and requested that the government reduce rent arrears or release what had been confiscated.

The bid opening and the process of awarding a contract

Beginning in 1932, the Guangdong provincial government (hereafter, the GPG) introduced public bidding competition for all tax-farming in Guangdong. Yongchang Company of in File No. 4 won the contract for the 1933 taxation on pig exports from Hainan Island.